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.

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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

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

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