From Whitney Tilson’s latest email to investors on Tesla…
Tesla Model X: Whitney Tilson: Takes It For A Ride
This email is exclusively about Tesla, so if you’re not interested in this company, simply delete it.
Michael Gelband’s Exodus Point launched in 2018 with $8.5 billion in assets. Expectations were high that the former Millennium Management executive would be able to take the skills he had learned at Izzy Englander’s hedge fund and replicate its performance, after a decade of running its fixed income business. The fund looks to be proving Read More
I attended Tesla’s tour of its Gigafactory in Sparks, NV (about 25 min outside Reno) from 9am to noon last Wed. There were about ~150 of us, most of whom appeared to be institutional investors (I ran into two Fidelity analysts, for example, who said they’d owned the stock since its IPO).
Below are my thoughts and photos, followed at the end of this email by responses from friends to whom I sent an early draft of this email plus a recent article from The New Yorker. Enjoy!
I was dumb enough to be short TSLA from ~$35 to ~$205 from early 2013 to early 2014 and, after that traumatic experience (by far my worst short ever, almost exactly cancelling out my best long ever, NFLX), haven’t had any position in it since.
I was tempted to get back in on the short side, however, after seeing an in-depth presentation by Mark Spiegel of Stanphyl Capital at the Robin Hood Investors Conference in November (www.tilsonfunds.com/TSLA-Spiegel-RH16.pdf) (I’ve also attached his Dec. letter, in which he shares further bearish thoughts on TSLA). There are many pillars of the short thesis, but if I were to summarize it, I’d quote a friend (not Spiegel):
The fundamental issue remains: If he can’t make money selling a car for $85,000 or more with zero direct competition, how will he be able to make money selling a car for $35,000 or even $45,000 or $55,000 with tons of competition?
The EV landscape will be pure commodity in as little as one year from now, with zero returns for anyone involved.
(There’s plenty more of the bear case at the end of this email.)
Before making a decision, I wanted to see the Gigafactory (I toured the Fremont, CA factory in 2013) and hear Elon Musk and CTO JB Straubel (link to recording below), whom I’d never seen before.
Overall, I was quite impressed and have decided not to short the stock – though with some feelings of regret because I think there’s a decent chance it works on the short side, but this is offset by my feeling that there’s maybe a 20% chance that Musk and Straubel pull another inside straight and the stock spikes upward.
I don’t need to outline the bearish case, as others do an excellent job of this, so I’m just going to hit a few bullet points on why I’ve decided to pass on shorting it:
· I think Elon Musk is the real deal. I’ve studied him closely over the years and read Ashlee Vance’s excellent book, Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, which leads me to believe that what he’s done with SpaceX may be even more impressive than Tesla. Given his penchant for self-promotion, wild dreams, and consistent overpromising, I initially thought he was little more than a shyster who got lucky with PayPal, but over time my view on him has changed: I now think he’s cut from the same cloth as Steve Jobs (see Walter Issacson’s book) and Jeff Bezos (see Brad Stone’s book: The Everything Store: Jeff Bezos and the Age of Amazon): a total maniac who can be brutal with people and burn them out (he works 20-hour days and expects his people to “only” work 16-hour days), who sometimes says over-the-top things, but also a visionary with insanely bold ideas who attracts equally brilliant and driven people to work for him. I like how he thinks. For example, last Wed. he said they built their factories and cars pretty much from scratch (95% original), rather than buying off-the-shelf components, which (if they do it well) can yield enormous competitive advantages. Later, he noted that the fastest auto manufacturing lines move at 0.2 meters/second, whereas a human walks 1 meter/second (5x faster), and said he saw no reason it couldn’t be 2-3 meters/second. If one company (Tesla) can speed up its output by 5x, whereas another has to build five factories, who’s going to win, he asked? This is silly talk, according to one friend (see below), but I’ve decided I don’t want to be short this guy…
· Two top engineering guys I met a couple of years ago who work/worked at Telsa told me that JB Straubel is also the real deal. One said to me: “There is NOTHING that Musk and Straubel can’t do”. Why would I want to be short BOTH of them?
· A friend in the know told me that the companies top engineers graduating from the top schools most want to work at are Google, Facebook and Tesla. And if you want to actually MAKE something – as opposed to spending your life trying to get users to spend one extra millisecond on your web page or click on one more spam ad – then it’s Tesla (and, if you’re into rockets, SpaceX) – and who else? I find it hard to believe that any top young engineer (the kind of person who actually WANTS to work 16-hour days) is going to take a job at GM over Tesla (or Lockheed Martin over SpaceX). Why would I want to be short the best, hardest-working engineering talent in the world?
· Tesla has built a very powerful brand. A BrandZ study from last June ranks it 10th in vehicle brands – but my gut says it’s a lot higher. Everyone I know/have met who owns a Tesla is intensely, passionately in love with it. That’s REALLY powerful.
· Tesla is operating in enormous markets: there are ~75 million passenger cars sold worldwide in 2016, plus battery storage is big and likely to get much, much bigger.
· The growth of electric cars will likely provide a huge tailwind: I don’t doubt Musk when he said on Wed. that “all transport with the exception of rockets – how ironic – will be electric – it’s just a question of how long it takes.” Only ~1% of cars sold last year were electric – and I think that number will be MUCH larger pretty soon – I’d guess 20-30% of all passenger cars will be 100% electric within 10 years.
· I’m well aware that pretty much every major auto manufacturer in the world is rolling out/will soon roll out electric cars, many of which look very promising in terms of styling, price, features (especially range), etc., which could severely impact Tesla. That said, for well over a decade, everyone predicted that Wal-Mart and others would crush Amazon, and Blockbuster,Amazon, Verizon, Hulu, etc. would crush Netflix. In terms of CEOs and ability to attract talent, Tesla reminds me of Amazon and Netflix…
· I think Musk and Tesla have enough of a following among very-deep-pocketed institutional investors that they’ll be able to continue raising as much capital as they need on very attractive terms – if so, this removes one of the best catalysts for shorting cash-burning, hope-and-a-dream companies.
· I much prefer to short companies that are bad for the world and/or hurt people: Herbalife, World Acceptance, etc. In contrast, I think Tesla has been very good for the world, forcing a sclerotic industry to invest heavily in EV. Every major auto company is now investing billions in this area – and I doubt even a fraction of this would be happening if Tesla hadn’t come along. Skeptics may be right that this tsunami of competition from companies with vastly more resources may crush Tesla – but irrespective of my view on the stock, I’m rooting for the company.
· I can’t say for sure if what I saw (and what we weren’t allowed to see) in the Gigafactory is revolutionary, allowing the factory to achieve its objective of achieving much lower costs; whether some new battery technology will make the entire factory obsolete in a few years; nor can I even hazard a guess what Tesla’s market share will be in 10 years (or even if the company exists – I well remember first movers like Iomega), but I admire Musk’s/Tesla’s boldness. This is the kind of thing (the Hoover Dam, putting a man on the moon, etc.) that that we seemed to do more often than we do now. In short, visiting the Fremont factory and Gigafactory made me proud to be an American.
In summary, today reminds me of early 2013, when the stock was at $35: the company was/is burning a ton of cash, has missed all sorts of deadlines, and there was/is much skepticism about a major new product launch (then: Model S; now: Model 3). Back then, I figured Musk/Tesla would have to pull an inside straight to beat me – but they did. In hindsight, I don’t think it was luck. They were much better engineers than I thought and built a brilliant, innovative car. Tesla is chock full today of even more, better engineers, led by the same two guys, so why would I bet against them now? Fool me once, shame on you. Fool me twice, shame on me…
Here are some other materials:
1) I recorded the 30-minute Q&A session with Musk and Straubel and have posted it
2) Here’s a link to a Bloomberg article last week about the Gigafactory: https://www.bloomberg.com/news/articles/2017-01-04/tesla-flips-the-switch-on-the-gigafactory
3) Below is the cover page of report on the tour by the PacCrest analyst.
4) Below are 20 photos I took – see captions. (We weren’t allowed to take photos on the tour inside the factory, alas.)
After the presentation, we broke into groups of ~20 and took a ~1 hour tour, during which we saw the batteries (each 70mm high and 21mm in diameter) being put into trays holding hundreds of them, the trays going into an “aging” room (so the electrolyte liquid can permeate the entire battery), then being placed into PowerWalls and other end uses. We were not allowed to see the section of the Gigafactory (run by Panasonic) where the batteries are actually made (the factory just started producing batteries within the past week; thus, the batteries we saw being placed into trays were imported from Panasonic’s factory in Japan).
We also saw a couple of open areas with row after row of long desks with I’d guess ~200 people all working on computers with dual monitors – most appeared to be engineers working on complex schematics related to the design of the factory or a car.
After the tour, we returned to the lobby for a 30-min Q&A with Musk and Straubel:
1) One friend’s comments:
a) Personally I wouldn’t put Musk in the same category as Bezos and Jobs just yet. Those guys have achieved much more. Amazon has “terrorized” every retailer in the world and is a market leader. I don’t think GM, BMW, etc. are as afraid of Tesla as Macy’s JCP Kohl’s and others are of Amazon. Same goes for Apple.
b) Musk is spreading himself too thin with too many projects (SpaceX, Cars, Solar, and much more). Where does he find the time to get onto Twitter? I find that worrisome. I also find worrisome that he constantly has to battle to whomever is not a fan. (e.g., Fortune magazine).
c) The quality of his products have yet to be proven (fires, autopilot failure, etc.). The man is hurting people in my opinion by essentially beta testing his products (autopilot) using the public. I find this absolutely criminal and am shocked no regulator has done anything about this. There are several videos which show how poor autopilot is. Also a test drive car caught fire this year and looking at the forums there are a ton of issues with brand new Tesla cars. If he can’t produce quality now with fewer cars, I have my doubts how he will do it in scale.
d) Everything is marketing with Tesla to keep people excited. The over the top announcements – which none are fulfilled. Even your visit appears mostly marketing as the factory is not finished and there were restrictions to the visit. And why does everything have a marketing twist? Gigafactory, Ludicrous mode, etc. It isn’t even the biggest battery factory in the world… That stuff about the manufacturing line is just more marketing. Not to mention the scrutiny by the SEC on their reporting. Overpromise and underdeliver is at the core of Musk.
e) Students want to work at whichever place is in fashion. Only just a few years ago, everyone wanted to work at an investment bank. So not sure it’s a predictor.
Bezos and Jobs produced the best products in the market without hurting anyone. Musk has an average product which has already been surpassed by competition. He has experimented without regard to human life. Compare that to Google which has been working on its autopilot for years in a controlled environment.
As I was driving today, I remembered something Pat Dorsey from Morningstar said. “Perceived product differentiation” vs “Real product differentiation” and at this point in time, I think that suits Tesla well. (Similar to Tiffany and Abercrombie). How long that last will be an important factor.
2) Another friend’s comments:
I read your piece about Tesla following the visit to the Northern Nevada Gigafactory.
The main fallacy in this pro-Tesla case is by way of this analogy: Two companies sue each other for some breach-of-contract issue. One company sues, and the other company counter-sues.
In order to figure out who is right, as an observer you read only one of these two complaints. You read only one side of the story. Then draw a conclusion based on that one side of the case.
Well, that’s what I am seeing here. You are basing a case for Tesla based on what you have seen and been told by Tesla’s management, and a visit to only their facilities.
You may ask yourself this question: Why are auto journalists and analysts who visit *ALL* of the automakers and their facilities around the world not as impressed by Tesla?
The answer is this: When you spend an equal amount of time with all of them — talking to management and visiting their R&D and production facilities — Tesla does not stand out.
Not in a positive way, anyway.
Does Tesla have a big factory that’s going up in Northern Nevada? Yes it does. Do other battery cell companies have the same? Yes they do.
Does Tesla have a good-looking and generally impressive automotive assembly line in Fremont, CA? Yes it does. And so the other automakers.
I would argue that Tesla’s assembly line — while impressive in isolation just like every car factory is — is easily and visibly inferior in almost every aspect to almost every other assembly line/factory — whether in the U.S., Japan or Europe.
Take for example factories such as Mazda in Hiroshima/Hofu (960,000 cars per year), Volkswagen in Wolfsburg (920,000 cars per year), and Toyota in San Antonio, TX (235,000 per year). All of these operations make Tesla’s Fremont assembly plants seem like nothing special, especially when you also consider the relative quality of the product that exits the assembly line.
It is certainly true that Tesla pioneered a great new automotive segment — the high-performance large electric sports hatchback — and that it blew the socks off the rest of the industry with superior software and the Supercharger network. No question about it.
However, at no stage was the company able to translate those laudable advances into a penny of profit. Instead, it’s producing losses to the tune of many thousands of dollars per car (up to $20,000 per car in net losses, even after factoring in tens of thousands of dollars in ZEV credits per car sold in the ZEV states). Of course, if you relax the constraint about having to make a profit, all sorts of companies start to look interesting. Webvan would have been interesting too.
The Tesla Model 3 will be a good car. However, it won’t make Tesla a penny of net profit in any year for the company as a whole. Ever.
Why? Because laws force the other automakers to produce far more electric cars than for which there is demand.
What does that mean? That they will have to sell them at a loss.
Talk to most automakers, and they’ll tell you that they will be content to sell at least a few percent of their output at $20,000 per unit losses.
Volkswagen-Audi-Porsche is launching 30 pure electric cars over the next decade, Mercedes at least 10, Hyundai four before 2020, and so forth. They will flood the market with super-attractive cars directly aimed at Tesla, and you’ll be buying some of them in *LESS* than two years from now.
It’s a mathematical impossibility for Tesla to make money selling cars at a profit, when all competitors will be content to sell them at a $20,000 per car loss for mix requirements and legal purposes.
I enjoy driving a Tesla as much as anybody — and I drive Teslas with some frequency.
1. Cars — electric and otherwise — from other automakers are just as good in many cases, and certainly better in some.
2. Those other automakers have literally approximately 100 very competitive pure electric cars in the pipeline that will hit the road over the next 1-2-3-4 years.
3. They will, or at least can, sell them at a loss.
4. Their manufacturing operations are superior to Tesla.
5. Their quality is vastly superior to Tesla.
So for all of these reasons I say: I like many of the aspects of driving a Tesla *the car*, but I think the stock could go to almost zero within as little as a year or two from now.
Finally, compare these two statements:
“Don’t worry, I’ve talked to all of my friends in New York, Washington DC, San Francisco and Los Angeles. Hillary will win in a landslide. At least 332 electoral votes. It will be a wipe-out. My friends know, as they are the experts.”
“Don’t worry. I’ve been to Tesla’s factories and they look impressive. Amazing stuff. And guess what? Elon tells me they’re so far ahead of the rest of the industry. So there is nothing to worry about. No need to go visit the competition and see what they are doing or what their factories look like.”
PS – I would be wary of analogies with Amazon, Netflix and SpaceX. Analogies don’t rule, especially if there is a fundamental flaw in the analogy. Tesla has almost none of the advantages of those other companies in areas such as IP, supply chain, “manufacturing”, quality or management skills, among other things. Not even close. It may sound cool or fashionable to compare Tesla with Amazon, Netflix or some other company such as Apple, but I see more differences than similarities. All those other companies either had scale, profits or positive cash flow, among other things. Tesla has nothing vital, other than good software and marketing skills — both of whom are nice to have and good things, but are far from necessary to make a profit in the automobile industry.
3) “…just yesterday Consumer Reports released its Annual Owner Satisfaction Survey and, once again, Tesla was on top. Of course results here are from consumers themselves and not the review magazine.” It’s not even close: 91% of Tesla owners say they’d buy Tesla again vs. 84% for the #2 car brand.
Comments on this from 2 friends:
a) I think there is something badly wrong with those numbers, although not completely so. Here are the reasons:
First, I personally know people who have sold their cars back to Tesla because of extreme dis-satisfaction. Others got rid of them to others, soon enough. Granted, this isn’t 50% or even 10% of owners that I know, but it’s not just one or two. Certainly more than from any other brand in the market.
Tesla is being compared with broad portfolios from the other automakers, and those portfolios include both their newest cars, and those that reflect technology from as much at five or more years ago. So it’s not an entirely fair comparison.
For example, owner satisfaction of the Chevrolet Volt is also very high, something in the neighborhood of 90%. It would not surprise me to see other electric cars also obtain high satisfaction numbers, once longer-range EVs come to market in the next year or two.
So why these high satisfaction numbers for EVs? Well, they are sold to enthusiasts for once. Second, someone who plunks down a lot of coin for an EV is reluctant to admit that they made a mistake. Even if they harbor regrets, they are unlikely to admit them in many cases. How many fund managers do you know who are equally fond to tell stories of stocks where they lost their shirts, as opposed to great trades that they made?
Many other owners I know have had tons of trouble with their Teslas, but they say they love them anyway. They have had multiple drivetrain and battery swaps, but “I love my Tesla.”
You have to wonder why, aside from not wanting to admit what would surely have been a disaster if that brand new Mercedes of BMW had required 3 new engines and 4 new transmissions in its first two years alone.
One partial explanation could simply be that the warranty took care of it, and that therefore the experience was not all that traumatic for the owner.
But that in turn begs the question as to what will happen with the warranty runs out — currently at the eight-year mark. If at that point you may be only 20,000 miles and/or 1-2 years from a $30,000 battery replacement, or a $15,000 motor replacement, then a used Tesla may not be worth anything at all in the used-car market.
And when that reality hits, Tesla’s ownership satisfaction could very well end up at the bottom of the list.
For near-term observation purposes, I would look at how many cars Chevrolet sells of the Bolt in January, February etc. — and the same thing for the Toyota Prius Prime. It will be harder for Tesla to generate incremental sales, with competition for plug-in cars becoming better and better every few months. I think both the Chevy Bolt and Toyota Prius Prime will out-sell Tesla in 1Q.
b) This is their love for driving an EV over the hassles of dealing with Tesla service & reliability. See the UBS survey from September re Tesla owners willingness to try other premium EVs when they’re available. To prove the point, I just looked up some model-specific numbers:
Model S: 94%
Chevy Volt: 90%
Model X: 88%
Now, since Tesla reliability is rated “below average” and it takes a month to get a service appointment, logically thinking what could cause the satisfaction besides the EV traintrain? (Note that the Volt is rated above the Model X, and it’s a “mere” Chevy.) It isn’t a legitimate judge of “the Tesla brand” vs. “luxury EVs” until we can put the Jaguar I-Pace, Audi E-tron, Porsche MissionE and Mercedes whatever-they-call it into the mix. Here’s a proposition: I’ll bet you a $1000 donation to the charity of either of our choice that in next year’s survey the Chevrolet Bolt (if there’s enough time to include it) at least matches the blended rating for Tesla. Would you then talk about the Chevrolet “brand”?
EV owners love EVs so much that they’ll put up with a lot of hassle to own them. I’ll be you that close to half of Tesla owners have had more than one Tesla, and yet here’s a great example of what I’m talking about, in that Woz has (apparently) had FOUR of them and yet look at how quickly he’s ready to switch now that something even CLOSE is available: http://insideevs.com/woz-chevrolet-bolt-better-daily-driver-tesla-model-s/
4) A thoughtful critique of Musk in The New Yorker below. Here’s a friend’s response:
Of this you can be certain:
Musk / Tesla will need far more money than they planned / originally stated
They will be late.
They will make an impressive product.
For what it is worth, calling out Musk for being late is getting old. It is a silly / easy excessive. OF COURSE he will be late. He has a LONG history of being late. EVERYONE doing anything ambitious is always late. Even the Apple earbuds were A LOT late when the company only makes a few products and even when it is a relatively simple product and even when they announced a date that was only a short time on the horizon.