Mark Spiegel’s Stanphyl Capital had a killer year up close to 31% NET YTD – see below for an excerpt on Tesla Inc (NASDAQ:TSLA) from their November shareholder letter. But first… although he is known as Elon Musk’s number one enemy, Mr. Spiegel makes most of his money from killer small cap picks. His under the radar small caps which could pop just based on this piece (if we discussed it publicly) were profiled in ValueWalk’s 2nd edition of our quarterly premium newsletter. See some details followed by the Stanphyl section on Tesla Motors.
For February 2017 the fund was up approximately 3.9% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 4.0% while the Russell 2000 was up approximately 1.9%.
Year to date the fund is down approximately 0.1% net while the S&P 500 is up approximately 5.9% and the Russell 2000 is up approximately 2.3%. Since inception on June 1, 2011 the fund is up approximately 127.8% net while the S&P 500 is up approximately 98.8% and the Russell 2000 is up approximately 77.2%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two.
We remain short shares of the market’s biggest single-company stock bubble, Tesla, Inc. (TSLA) which early in February dropped the word “Motors” from its name so it can promise its shareholders a wider array of non-profitable (and often non-existent) future products, then later in the month reported an awful 2016 Q4, with over a billion dollars of negative free cash flow (despite the acquisition of over $200 million in cash from SolarCity) and capex spend that was almost $600 million less than it claimed it would be in its 10-Q published in November of that same quarter. (Was this a blatant lie or just gross incompetence?) Also of note is that sales of the Models S/X have stopped growing, with Q4 deliveries thousands fewer than Q3’s, and Tesla guided to similar results going forward. (And this flatlining in growth is happening before the arrival of superior and less expensive electric SUV/crossover competition from Jaguar, Audi and Mercedes in 2018.) Of course, the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3” and yet the Q4 results (a 23% gross margin on cars selling for an average price of $104,000) reinforce my Seeking Alpha article’s claim that will never happen, and even if it does, good luck selling and servicing those cars. Musk claims the Model 3 will be in true mass production later this year and yet the company is just starting to build some testing prototypes; thus, the only Model 3 “buyers” this year will likely be test pilots (either voluntary or involuntary). But hey, how about “Tesla Energy”? Sorry, but the Q4 battery storage gross margin was massively negative, as overall gross margin for “Energy Generation & Storage” was just 2.7% and that included a LOT of 30% gross margin SolarCity revenue. And in January the Tesla Energy sales director left and in December the “VP of Products & Programs” was gone, I’m sure things there are going GREAT! And oh, I almost forgot: at the beginning of the conference call it was announced that Tesla’s CFO quit (on one day’s notice) and is being replaced by the (more flexible?) original CFO. Always a good sign!
Meanwhile, simple math and follow-up math imply that Tesla imminently needs to do yet another massive capital raise to finish the Gigafactory and get the Model 3 into production, even though it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion in May 2016 explicitly to put the Model 3 into production.
Also in February, in new crash tests by the Insurance Institute For Highway Safety the Model S fell short of a safety rating awarded to 42 other cars while analysis of data from the state of California showed that its autonomous driving system was statistically far behind most of the competition’s. Then the excellent investigative journalists at Daily Kanban proved that the videos Tesla put out promoting its new system were hugely deceptive. (Don’t believe it? Hurry up and watch this before Tesla takes it down!) And remember, the January CES show was a cacophony of deep-pocketed competition for Tesla in autonomous driving: Delphi and Mobileye demonstrated an autonomous system available “off the shelf” within three years to any car maker, thereby further turning this capability into a commodity and rendering meaningless (except for potential liability lawsuits) whatever “head start” Tesla’s latest reckless
(because it has no LIDAR) system might provide. Then both Audi and Mercedes announced sophisticated autonomous driving partnerships with NVIDIA, as did BMW with Intel and Mobileye. Meanwhile, the head of Tesla’s program quit to start his own company (and was sued by Tesla for doing so) and was replaced by a smart ex-Apple guy whose previous job was programming iPhones, and who has already distanced himself from Musk’s claims about full (Level 5) autonomy occurring any time soon.) So does anyone with a brain in his head seriously think Tesla is ahead of the rest of the industry in safe autonomy? And as everyone will have Level 4 autonomy within 3-4 years, what exactly would, say, a one-year lead on a commodity be worth anyway, especially when its possessor is unable to profitably monetize it?
As for the political environment (very important for subsidy-queen Musk), Trump’s first budget is expected to demand massive cuts in EPA climate change programs, yet despite this 180-degree turn in government policy, stock-pumping sell-side analysts and a complacent media recently promulgated the nonsensical assertion that Musk and Trump have developed some kind of “relationship” simply because Trump (undoubtedly as a favor to friend-in-common Peter Thiel) stuck Musk on a couple of “advisory committees.” Does anyone with a brain in his head think Trump isn’t well aware of these comments from Musk in November and isn’t one heck of a grudge-bearer? At one of those meetings you can watch Trump brush right by Musk while happily greeting pretty much everyone else in the room, and note that he explicitly didn’t invite Musk to a well-publicized meeting with the heads of all the other U.S. automakers. Trump wants to create American manufacturing jobs by cutting environmental regulation and slashing corporate taxes, the latter of which is great for real businesses with profits, but of no help to a cash-burning Musk vanity project such as Tesla.
And what about the Gigafactory? Battery production is a mostly automated, modular process with few economies of scale beyond a size much smaller than “Giga”. Alpha published a terrific article about this specific to Tesla and soon Chinese producers will match or beat any price coming from the Gigafactory. fact, have a look at this amazing data showing where the real “gigafactories” are. Battery cells are indeed a commodity.
Meanwhile, GM’s new Bolt EV (Motor Trend’s 2017 “Car of the Year”) has an EPA-rated range of 238 miles, handily topping the 210-miles of the cheapest Tesla Model S (which is over $30,000 pricier) while matching its 94 cubic feet of interior passenger space and posting a zippy 0-60 time of 6.5 seconds. As studies show that 15% of Tesla buyers came from a Prius and many others came from other inexpensive “eco-favorable” cars, I’d been expecting the Bolt to grab back a significant number of them and apparently it has— already outselling the Model S in the U.S with distribution in just two states (!), and as 2017 progresses Bolt availability will roll out to all 50 states.
Of course, the Bolt is just the first of an onslaught of competition Tesla will soon confront in all facets of its business. (Note: these links are updated monthly.) First, here are the competing cars…
And in China…
Here are the competing car batteries…
LG Chem targets electric car battery sales of $6.3 billion in 2020 Samsung Presents Innovative Fast Charging Battery with 600km Range Samsung SDI to build $358 million car battery plant in Hungary by 2018 SK Innovation to quadruple capacity of EV batteries
Here are the competing storage batteries…
Schneider Electric sonnenBatterie Kokam
Lockheed Martin Alevo
Adara Blue Planet
Tabuchi Electric Younicos Orison
Moixa Powin Energy Nidec Powervault
(And by the time the lithium ion Gigafactory is completed, it will not only be an oversized white elephant but may be obsolete, as “ Argonne Settles On The Two Most Promising Successors To Lithium Ion Batteries.
Here are the competing autonomous vehicles…
Mercedes will give Tesla’s Autopilot its first real competition this year Nvidia and Mercedes-Benz to bring an AI car to market within a year New Audi A8 to be world’s first Level 3 autonomous production car
Toyota Bets Big On Autonomous Tech, Swallows Millimeter Radar Maker Hyundai Presents Autonomous IONIQ Electric Prototype at 2017 CES Delphi & Mobileye to sell autonomous system to any car maker by 2019
Baidu Announces Strategic Autonomous Driving Partnership with BAIC Mitsubishi Electric Adapts Missile Guidance Systems for Self-Driving Cars California gives Nvidia the go-ahead to test self-driving cars on public roads Hitachi demonstrates vehicle with 11-function autonomous driving ECU DENSO and NEC Collaborate on Automated Driving and Manufacturing France rolls out ‘world’s first’ driverless buses
And here are the competing charging stations…
EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US ChargePoint Express Plus Debuts: Offers Industry High 400 kW DC Fast Charging BMW and Volkswagen Take on Tesla Motors With a New U.S. Fast-Charging Network BMW, Nissan fund EVgo fast-charging network expansion
I’ve argued for a while that the “Tesla love/loyalty” one reads about on the forums (“Even though my
Tesla is in the shop a lot I’ll never go back to a regular car!”) and in the latest Consumer Reports owner survey is really “EV loyalty/EV love”—in other words, many people like the instant torque and quietness of their EV drivetrains, not necessarily the fact that their frequently repaired cars happen to come from
Tesla equipped with the interior “luxury level” of a 1990s Acura. A September survey from UBS seemed
or interior, especially as fear grows that Tesla’s cash bleed means it may not be around to honor the eight-year drivetrain warranty that those “reliability issues” force it to provide. (Tesla’s Model X has been a quality-plagued disaster, with Consumer Reports in November giving it an overall rating of 59 on a scale of 100—tied for worst among 16 competing vehicles in its class.)
In addition to its quality problems, the X’s multi-thousand-dollar premium to a comparable Model S sedan is a huge sales-limiting factor, as nearly all the luxury competition prices its premium SUVs considerably less expensively than its premium sedans. For instance, the most basic “X” with no options and a warm-weather range of just 237 miles (well under 200 miles in cold weather) starts at $88,800 with only five seats standard. By comparison, the Porsche Cayenne starts at $59,600, the Audi Q7 at $49,000, the BMW X5 at $55,500, the Volvo XC-90 at $45,750, the Jaguar F-Pace at just $41,990 and the seven seat Mercedes GLS at $68,700, and all those vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips. And as noted earlier, the upcoming pure electric “crossovers” from Jaguar, Audi and Mercedes are all expected to price at least $20,000 cheaper than the least expensive Model X.
Meanwhile, the heretofore revered Model S is now on the Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability” (although the new models have improved to “average”). On the bright side though, Tesla owners get to make lots of new friends at their local service centers, assuming they don’t mind the month-long wait times for an appointment.
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition, and things will only get worse once it does. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $45 billion enterprise value and—thanks to that debt—may eventually be worth “zero.”