Mark Spiegel’s Stanphyl Capital had a killer year up close to 31% in 2016 – see below for an excerpt on Tesla Inc (TSLA) from their May 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.
We remain short shares of this bubble-market’s largest individual bubble, Tesla, Inc. (TSLA), which has seemingly morphed into our own “Big Short” but, fortunately, with far more liquidity than those guys had in the book/movie. Tesla was up 8.5% in May (59.6% year to date) despite reporting a disastrous Q1 2017, with an operating loss of $258 million and a net loss of $330 million ($2.04 per increasingly diluted share), while the market for its luxury EVs (Models S&X) is clearly saturated even before the arrival of next year’s competition from Jaguar, Audi and Mercedes:
Q3 2016 deliveries: 24,821
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Q4 2016 deliveries: 22,252
Q1 2017 deliveries: 25,051
Q2 2017 deliveries: 24,000 (estimate)
In fact, Q2 2017 (the one we’re in now) was headed for a much worse sales comp vs. the previous three quarters (and may still be, thanks to the disappearance of a major tax break in Hong Kong) when in a mid-April move of desperation Tesla slashed the price of the Model S75 by $7500 to $69,500 and in mid-May brought back free lifetime Supercharging for buyers with (easily found) “referral codes.” (Say hello to an instant 2% margin hit for that one!) Considering that in Q1 COGS per car sold (not leased) was approximately $81,000 at an ASP of approximately $108,000 (adjusted for Autopilot revenue deferred from Q4 but not counting the $1000-$2000 renewed hit for free Supercharging), it seems pretty clear that Tesla will now sell lots of Models S & X at (or below) cost hoping to make a small gross margin via the options. This does not bode well for the Model 3, which will supposedly start at $35,000. (I discuss this in greater depth below.) And remember, in April Tesla’s “Supercharger moat” was definitively drained when
Electrify America announced a charging network that will be both 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.
And how did Tesla energy storage do in Q1? (Because, you know, Tesla is really a battery company!) How about total revenue of $5.2 million (down 76% year over year!) at a double-digit negative gross margin? How’s that for “ crazy off the hook”! 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 in May Tesla’s battery cell supplier Panasonic (that’s right, Teslarians: Tesla doesn’t make its own batteries) announced that it’s going all out to supply its batteries and electric car design skills and components to all comers. Of course none of this stopped Tesla in May from continuing to promote the “energy narrative” by introducing glass solar roofing tiles (a previously failed product for multiple others) with a nonsensical financial analysis that I was happy to debunk on Seeking Alpha. Also in May, SolarCity CEO/co-founder (and Musk cousin) Lyndon Rive announced his departure, although this actually makes sense as now that Musk used Tesla shareholder money to bail out his personal $500+ million SCTY stake (as well as his cousin’s smaller stake), it’s time to gradually allow that cash-burning acquisition to fade into the sunset (no pun intended).
And hey, speaking of departing Tesla executives, those energy storage guys and Musk’s cousin must’ve been flukes because Tesla has so many great days ahead of it, right? Well, first read about what a hellhole it is to work there and then have a look at this terrific executive departure list (missing the latest, hellhole-related departure) compiled by Twitter user @WallStCynic and judge for yourself—I personally find the number of 2016 & 2017 escapees to be quite eye opening:
Of course the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3”
(with an estimated ASP of $43,000), and yet Tesla’s normalized gross margin of around 23% (including the restored free Supercharging) on cars selling for an ASP of approximately $108,000 reinforces my old Seeking Alpha article’s claim that a $35,000 base-priced Model 3 can only happen at a massive per-car loss. A new report from UBS agrees, although it optimistically thinks a high-volume, well-optioned Model 3 may break even at $41,000. Although I think UBS is optimistic, for the sake of argument I was willing to assume it was correct and wrote an article for Seeking Alpha incorporating that information to explain why Tesla’s current $1 billion annualized operating loss will still worsen in 2018. Rather than repeating that explanation here, please do read the article.
Additionally, Model 3 sales (regardless of its profit margin) are likely to disappoint. In fact, I expect mass reservation cancellations to occur when the $7500 tax credit runs out by mid-2018. Just have a look at the Model 3 equipment level (compared to, say, a Honda Accord) and (in a new spyshot posted by the Tesla shills at Electrek.co) its incredibly cheap looking, glued-on iPad-like dashboard (with no gauges or head-up display):
Meanwhile, 2017 crash tests by the Insurance Institute For Highway Safety show the Model 3’s big brother the Model S (proclaimed by Musk to be “the world’s safest car”), falling 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 autonomous system were hugely deceptive. (And as noted in the “executive departures” chart above, multiple people have left the program.) Then in May we learned that the CPU in Tesla’s hardware suite is incapable of full autonomy despite Tesla charging $8000 up-front for that “future capability.” (Hello, “future class action lawsuit”!) Current Teslas also have no LIDAR and yet experts universally say LIDAR is required for full autonomy. So have 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. Tesla also now faces two significant safety-related class action lawsuits: one for sudden acceleration and one for dangerously malfunctional and deceptively marketed “Autopilot”, plus a slew of Model X lemon-law lawsuits. And how about all that great Tesla IP because, you know, it’s really a “technology company”? Oops… what IP?
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
Infiniti to launch performance EV with Nissan tech by 2020 Nissan, Renault, Mitsubishi to share electric car platform MG E-Motion confirms new EV sports car on the way by 2020 All electric Lucid Air to Start At $52,000 After Tax Credit Maserati executive confirms electric Alfieri
And in China…
GAC Begins Construction of $6.5 Billion Industrial Park to Boost EV Business Chinese electric car start-up Future Mobility edges closer to taking on Tesla Honda to debut electric vehicle in China next year
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
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
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 Bosch and Daimler join forces to market fully automated, driverless taxis by 2020
Nissan and Mobileye to generate, share, and utilize vision data for crowdsourced mapping BMW, Intel, Mobileye & Delphi Developing Autonomous Driving For Multiple OEMs Volvo plans to offer fully self-driving car to luxury buyers
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 networks…
ChargePoint – InstaVolt partnership; more than 200 UK rapid charge systems ChargePoint Express Plus Debuts: Offers Industry High 400 kW DC Fast Charging Fastned building 150kw-350kw chargers in Europe
5 European fast charging networks form Open Fast Charging Alliance Shell starts equipping petrol stations with electric chargers
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
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:
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 has helped result in hugely disappointing sales, 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 $15,000 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), while its market cap now exceeds those of Ford and GM despite a billion dollar annualized operating loss selling just 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its nearly $65 billion fully-diluted enterprise value and— thanks to its over $7 billion in debt—may eventually be worth “zero.”