Excerpted from Whitney Tilson‘s latest email to investors entitled “Tesla Debate”

You can ignore this email if you’re not interested in Tesla, which recently surpassed GM to have the highest market cap of any U.S. automaker. I have no position – though almost daily I’m tempted to short it – but I think it’s a fascinating company, with a fascinating debate around its stock. Below are various blurbs about the company, including a bull-bear debate among folks on my TSLA email list (reply to this email if you want to be added to it).

1) Kudos to Ycombinator, who posted this on the TSLA message board on ValueInvestorsClub.com in 2012:

 

“Obviously, the numbers/valuation are what they are, but I wouldn’t short TSLA.

 

What they did bringing the Model S to market in 4 years is nothing short of astounding and Elon Musk is the right kind of crazy, like Bill Gates, Steve Jobs, Jeff Bezos kind of crazy.

 

I wouldn’t go long either, making cars is a tough business, but there’s crazy, visionary entrepreneur risk here for the shorts.”

 

2) Mark Spiegel discusses TSLA with other investors on the SumZero message board:

 

Managing Member

$100M – $500M HEDGE FUND

APRIL 09, 2017

Count me as someone who thinks Elon is a genius… and simultaneously a snake-oil salesman. What do you think it takes for Tesla to grow into this valuation? I know a lot of bears on the stock including myself but the bulls I know are smart as well. I guess the real question I’m asking is — at what point

——————

Mark Spiegel

STANPHYL CAPITAL

APRIL 09, 2017

 

When it comes to cars, at least, Musk’s ONLY “genius” is as a snake-oil salesman (and a glommer of government subsidy and regulatory largesse). To grow into its valuation Tesla would profitably have to sell MILLIONS of cars a year, and yet by the end of the current quarter (Q2 2017) you’ll see four straight quarters of ZERO sequential Model S&X growth and that’s BEFORE the onslaught of luxury EV competition arrives in 2018. Meanwhile, the Model 3 will be a money-losing disaster that may very well bankrupt the company.

 

You think the Tesla bulls are “smart”? The bulk of the stock is in the hands of the PMs at Fidelity, T. Rowe, Baillie Gifford and Tencent. Maybe those guys are smart about SOME things, but read interviews with them about Tesla and you’ll see how absolutely clueless they are about the emerging competitive landscape in EVs, batteries and autonomy. (And no, I haven’t seen any interviews with the PMs at Tencent, but I know Chinese people who tell me they’re equally clueless about Tesla.) When this bubble implodes anyone who bought into it with OPM despite hundreds of facts thrown in their faces should take up his rightful career as an Uber driver (except Uber may implode by then too, so they may just have to be REGULAR cab drivers).

 

That said, my timing on this presentation has admittedly been awful as the stock was in the $180s when I gave it. (My fund’s blended basis is probably somewhere in the low $200s.) But time is NOT on Tesla’s side and meanwhile its debt (and losses) keep accumulating!

——————

Managing Member

$100M – $500M HEDGE FUND

APRIL 09, 2017

Let’s say, Tesla sells 500k cars against all expectations. What’s the revenue? 25b+ — does the market even care if it’s profitable? I’m just trying to figure out how much more pain you might have to take before the thesis starts working. Does it trade at 3x sales at that point?

 

Frankly, to say his only genius is as a leech is pretty dismissive. This one company has pushed every car manufacturer to now create EVs and play catch-up. SpaceX is at the forefront of engineering and rocket technology. He’s upended at least 2 industries and made the smartest people believe things are now possible that were thought impossible just a few years back. How many Tesla bears said there’s no way they produce a Model S, there’s no demand for the Model S, the model X is vaporware? The thesis has changed just as often for the bulls as for the bears.

 

Again, I am a bear but I don’t know what the path is – maybe it’s $500 first. Corporate governance is awful – maybe the worst I’ve ever seen for such a large company. If they produce a Model 3 in quantity I believe there will be demand for it. I have little doubt that people will step up to fund capex when they ask for more money. The questions become – can they build it without any hiccups? and is there a case for 1mm cars of demand? I hope I am putting in a top by asking these questions :)

——————

Mark Spiegel

STANPHYL CAPITAL

APRIL 09, 2017

@Managing Member

I said “when it comes to CARS his only genius is selling snake oil.” I don’t really know enough about the rocket company to comment, except that for a very long time the web site proudly declared it was profitable and then the WSJ found it he was lying about that too!

 

As for Tesla, why is it genius to sell $1 of product for .80 cents? Yes, we bears underestimated the market size (I never thought he’d sell 90,000 S&X a year) but (at least when I started shorting this) even a number that big didn’t change how grossly overvalued it was at the time. And now it’s a lot more grossly overvalued and those sales are stalled out and in 12 months Jaguar and Audi roll out much nicer cars for considerably less money and Mercedes does the same in 18 months.

 

If people NEVER care about profits I can’t tell you what will happen with the stock. But Tesla needs billions of dollars a year in fresh capital infusions and it’s one thing to find “dumb money” but something else entirely to find “deep-pocketed dumb money.”

 

As for other OEMs catching up to Tesla, in fact Tesla is now behind all the OEMs in safe autonomy and is using an obsolete battery format– all the new clean-sheet EV designs had the option of wiring together 7000 or so small cylinders as Tesla does (and HAD to do when it designed its battery pack around 2006 or so). Instead, they’ve all chosen to go with large-format prismatic cells that weren’t available with sufficient energy density at sufficiently low cost when Tesla pioneered the market. So Tesla is Commodore, Palm Pilot, Iomega and Blackberry all in one.

 

And sure there may be demand for the Model 3, but Tesla has almost $80,000 in variable cost at a $104,000 ASP for the S&X, so with a slightly smaller battery pack (maybe 60kWh instead of an average of 80kWh or so) please explain how it will make money pricing a car with a $35,000 base! Hell, even Musk essentially admitted on the last conference call that for a while it will have negative GROSS margins! My guess is that even on well optioned Model 3s Tesla will lose an average of $6000 to $8000 per car on a VARIABLE basis, before even accounting for the massive increase in SG&A required to support and service them.

 

All that

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