Mark Spiegel’s Stanphyl Capital had a killer year up close to 31% in 2016 – see below for an excerpt on Tesla Inc (NASDAQ:TSLA) from their April 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. Below is an excerpt on Tesla stock.
I briefly contemplated skipping the Tesla section of this month’s letter and just letting you read this guy, but as that wouldn’t be any fun, I elected not to. Yes, we remain short shares of this bubble-market’s largest individual bubble, Tesla, Inc. (TSLA) which in April reported Q1 car deliveries of “just over 25,000 vehicles.” So let’s look at a full year of “growth” in this alleged “hypergrowth” company:
Q3 2016: 24,821 cars
Q4 2016: 22,252 cars
Q1 2017: 25,100 cars
Q2 2017: 25,000 cars (estimate)
Actually, Q2 2017 was headed for a negative sales comp vs. Q1 2017 (and Q3 2016) when in a mid-April move of desperation Tesla slashed the price of the Model S75 by $7500 to just $69,500. Considering that in Q4 2016 (the most recent quarter for which financials are available), COGS per car was $82,000 at an ASP of $104,000 (perhaps now reduced to $80,000 without lifetime free Supercharging, and with a slightly higher ASP as Tesla didn’t book Autopilot revenue in Q4), it seems pretty clear that Tesla will now be selling a lot of cars at or below cost hoping to make a small gross margin via the options. This doesn’t bode well for anything but losses on the Model 3, which will supposedly start at $35,000. (I discuss this in greater depth below.)
But perhaps the most important news in April is that Tesla’s “Supercharger moat” is definitively being drained, as Electrify America is building a charging network that’s vastly larger and faster. So the sole advantage Tesla had (easier but still klugey long-distance travel) over myriad soon-to-arrive competition will soon be gone.
Meanwhile Tesla now faces two significant concurrent class action lawsuits: one for sudden acceleration and one for dangerously malfunctional and deceptively marketed “Autopilot” (or as I affectionately call it, “Autocrash”), plus a slew of Model X lemon-law lawsuits. Perhaps as a distraction to demonstrate “safety pseudo-proactivity” rather than deal with those potentially life-threatening product flaws (or this one or
this one), Tesla instead announced a non-safety-related recall of 50,000+ cars for a parking brake that may occasionally not release. (“Hey, look at this shiny recall over here, not the much more significant ones we’re NOT doing!”)
And of course as is well known by now, in April Tesla’s market cap exceeded those of both Ford and GM, despite its losing massive amounts of money selling approximately 100,000 cars a year while Ford and GM make billions of dollars selling approximately 6.6 million and 10 million cars respectively.
Also in April, Musk pumped his stock with a nonsensical Tweet about (and TED-Talk mention of) a Tesla long-haul electric truck; good luck with that. And at that same TED Talk he also announced plans for some kind of tunneling business with car-carrying electric skateboards (how many billions per mile will that cost?) and four more Gigafactories. (I hope he builds the latter, presumably at $4-$5 billion each, as they’ll open just in time to be rendered obsolete by solid-state batteries.) Let’s face it: this guy will keep incinerating cash (or trying to) in various government-subsidized schemes until the taps are finally turned off, at which point it will be game-over for him just as it was for every other leveraged stock promoter in history, and 100 years from Elon Musk will be just another interesting but obscure Wikipedia entry.
Finally, perhaps my favorite Tesla-related “event” in April could be this hilariously petulant response to a group of TSLA institutional investors (but not the obsequious toadies at largest shareholder Fidelity) requesting the appointment of two independent (i.e, non-Musk-yes-man) directors:
(with an estimated ASP of $43,000), and yet Tesla’s normalized gross margin of 25% on cars selling for an ASP of approximately $105,000 reinforces my Seeking Alpha article’s claim that a $35,000 base-priced Model 3 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. And what quality of car will buyers be getting for their $35,000? Have a look at the dashboard of a $33,500 BMW 320i (on the left) vs. a spyshot of the purported instrument-free dashboard of a Tesla Model 3:
But hey, how about “Tesla Energy”? Sorry, but the Q4 battery storage gross margin was negative. 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) and was replaced by the (more flexible?) original CFO. Always a good sign!
Tesla’s Q4 2016 operating loss (the most recent quarterly report available as of this writing) was $267 million, although the recognition of deferred autopilot revenue might have reduced that to around $200 million. Now that deferred revenue may be added into the Q1 2017 report (providing a one-time artificial earnings boost), along with perhaps $140 million of additional gross profit for the higher delivery number and autopilot revenue recognition for cars sold in Q1. So depending on ZEV credits and additional D&A, all else being equal Tesla should report a Q1 operating loss of somewhere between $60 million and $100 million. But then there’s the “SolarCity factor”…
For the full year 2016 SolarCity (purchased by Tesla late that year as a bailout for Musk’s potentially worthless SCTY stock) had an operating loss of $650 million. Even if we assume that Tesla has slashed that loss considerably by shutting down some of the company (after Musk was safely bailed out, of course), it seems reasonable to guess that SCTY should still be around a $100 million quarterly earnings drag on Tesla. However, I find SCTY’s financials to be unfathomable (undoubtedly deliberately so on the part of the company), and it’s possible that in any given quarter (perhaps even Q1 2017, which reports next week) Tesla may be able to utilize this “SCTY unfathomability” to report a profit despite demonstrating awful cash flow. (In particular, watch out for the elimination of noncontrolling interests.) So the only thing in Tesla’s Q1 2017 earnings report that would shock me would be positive free cash flow… and the chance of that occurring is even less than that of Musk making me best man at wedding #4.
Meanwhile, in 2017 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” is. And in April a third and fourth key guy left the program after its director left a few months earlier. Take a look at those videos and 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? In fact, the current Tesla hardware suite has no LIDAR and experts say LIDAR is required for full autonomy. no wonder a class action suit was filed about this in April.
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…
2018 Jaguar I-Pace: production car set for September 2017 Frankfurt debut Jaguar Land Rover says half of its new cars will have electric option by 2020 Porsche Mission E electric car to have wide range of variants
And in China…
Volkswagen To Launch 8 New Energy Vehicles In China GM plans to launch 10 electric cars in China by 2020 Audi and FAW sign China electric car cooperation deal Ford to Make Electric Cars in China Amid Green Drive
Here are the competing car batteries…
UK provides millions to help build more electric vehicle batteries Former Tesla executives plan to build $4bn Nordic battery plant Rimac is going to mass produce batteries and electric motors for OEMs
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
electrIQ Belectric Sunverge Stem
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…
Intel to Acquire 15 Percent Ownership of HERE For Autonomous Vehicles 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
Mitsubishi Electric Develops Automated Mapping For Autonomous Driving 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…
ELECTRIFY AMERICA UNVEILS FIRST $300M OF $2B INVESTMENT IN ZEV INFRASTRUCTURE BMW, Daimler, Ford, VW, Audi & Porsche JV for 350kw Charging On Major Highways in Europe Chargepoint Europe Gets $82 million in new funding from Daimler
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
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
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 recent 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 $82,500 with only five seats standard. By comparison, the Porsche Cayenne starts at $60,600, the Audi Q7 at $49,000, the BMW X5 at $56,600, 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 nearly $60 billion fully-diluted enterprise value and—thanks to its nearly $7 billion in debt—may eventually be worth “zero.”