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 March 2017 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.
We also remain short shares of this bubble-market’s largest individual bubble, Tesla, Inc. (TSLA), which in March raised (through a combination of stock and convertible debt) vastly less money than it needs to get through 2017 (unless it’s lying—again!—about projected capex). As of 12/31/16 Tesla had $430 million of net working capital and said it planned to spend $2-$2.5 billion in capex before the supposed September production of the Model 3, while operating losses have been averaging at least $150 million per quarter. Simple math thus tells us that Tesla will consume approximately $2.5 to $3.0 billion by the end of September, and yet its March raise netting approximately $1.2 billion (in convertible debt plus some equity) plus its $430 million of 12/31 working capital leaves it shy by around a billion dollars before the inevitable additional operating losses and capex in Q4 and well into 2018 (actually, well into infinity, with “infinity” defined as “between now and Chapter 11”). Meanwhile, Tesla now has approximately $7 billion in debt not including its massive “take or pay” battery obligations to Panasonic.
As an example of the fine “progress” Tesla has made over the past three years in the eyes of debt investors
(a far more analytical crew than the no-homework, bubble-market stock jockeys who own its equity), let’s have a quick look at the terms of the 2014 converts vs. the new ones; note both the significantly higher interest rate and significantly lower conversion premium demanded today vs. three years ago. Here are the terms from March 2014:
And here are the terms from March 2017:
Despite Tesla’s disastrous financials, its stock got a bit of a pop when it was revealed (via a 13-G filing) that publicly traded Chinese holding company Tencent had taken a 5% stake in it. Although part of this purchase was as a participant in the $350 million equity portion of the March financing, the average overall price of Tencent’s position is in the $217s (vs. the $262 price of the offering), meaning that nearly all its shares were bought in the secondary market with little of the investment going to Tesla. Also interesting is that Tencent bought exactly 5.0% of Tesla—just enough to file the 13-G as a sort of “press release” to boost the price of TSLA and thus its own stock. Tencent is almost certainly now finished buying TSLA because if it wanted more it would have done so before filing the 13-G that it knew would make any future purchases more expensive. And here’s the punchline: Tencent borrowed the money it used to buy the stock! So just as the Japanese top-ticked U.S. asset prices in 1989, perhaps now it’s time for the Chinese to do so.
Of course the new, more onerous terms of Tesla’s March convertible debt issuance occurred partially because in February it reported an awful 2016 Q4, with over a billion dollars of negative free cash flow 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 combined sales of the Models S&X have sequentially stopped growing, with Q4 deliveries thousands fewer than Q3’s and Tesla guiding to similar results going forward. (And this flatlining in growth is occurring before the arrival of superior and less expensive luxury electric competition from Jaguar & Audi in 2018 and Mercedes & Porsche in 2019.) 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 can only happen at a massive per-car loss, and besides, good luck selling and servicing those cars. Meanwhile, 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), and here’s a terrific article pointing out what a logistical and financial disaster that will be. 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, so I’m sure things there are going GREAT! And oh, I almost forgot: at the beginning of the Q4 conference call it was announced that Tesla’s CFO quit (on one day’s notice) is being replaced by the (more flexible?) original CFO. Always a good sign!
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, while you can watch this or this to see what a disaster Tesla’s latest “autopilot” truly is. Then take a look at the “Autonomous Driving” links a few pages below and tell me how anyone with a brain in his head could 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 makes 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 had 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 appily 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, while Musk’s whine in March about Trump’s NASA plans undoubtedly only further damaged the relationship. The bottom line is that Trump wants to create American manufacturing jobs by cutting environmental regulation and slashing corporate taxes, and the first policy is diametrically opposed to the alleged “environmental mission” of Tesla (run by an “environmentalist” who flies around in a Gulfstream G650ER) while the tax cutting policy 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 and watch out for a looming oversupply.
Meanwhile Tesla faces an onslaught of competition in all facets of its business. (Note: these links are updated monthly.) First, here are the competing cars…
Audi e-tron to start @ €60,000 vs. $88,800 for base Tesla Model X Audi’s three-pronged EV assault: electric Audi roadmap revealed Mercedes Spotted Testing Four Electric Models For Launch in 2018-19 Daimler to invest $11 billion in electric vehicles
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 set to expand EV battery capacity
Here are the competing storage batteries…
AES Mitsubishi NEC Hitachi ABB
SOLARWATT Daimler Schneider Electric sonnenBatterie Kokam
Nissan – Eaton Tesvolt Kreisel Leclanche
Lockheed Martin Alevo
Adara Blue Planet
Tabuchi Electric Younicos Orison
(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” and the guy who invented the lithium ion battery has now invented something better.)
Here’s the competition in autonomous driving…
Audi and NVIDIA team up to bring fully automated driving accelerated with artificial intelligence NVIDIA Partners with Bosch for System Based on Next-Generation DRIVE PX Xavier Platform Volkswagen and Mobileye sign agreement to develop autonomous driving
Intel’s $15 billion purchase of Mobileye shakes up driverless car sector Delphi & Mobileye to sell autonomous system to any car maker by 2019 Volvo plans to offer fully self-driving car to luxury buyers
Toyota Bets Big On Autonomous Tech, Swallows Millimeter Radar Maker Hyundai Presents Autonomous IONIQ Electric Prototype at 2017 CES Alphabet’s Waymo to supply autonomous hardware & software to any car maker Autonomous Nissan Leaf Video
Mitsubishi Electric Develops Automated Mapping For Autonomous Driving Baidu Announces Strategic Autonomous Driving Partnership with BAIC 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…
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
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
(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” and the guy who invented the lithium ion battery has now invented something better.)
Here’s the competition in autonomous driving…
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 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. Here’s a new study from McKinsey supporting this:
So when the Germans (Audi, Mercedes and Porsche) and Jaguar roll out their 300-mile luxury EVs in 2018/2019 they’ll capture a lot of Tesla owners who love Tesla’s driving experience but not its reliability 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 $85,500 with only five seats standard. By comparison, the Porsche Cayenne starts at $60,600, 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 $50 billion enterprise value and—thanks to that debt—may eventually be worth “zero.”