Mark Spiegel’s Stanphyl Capital is famous for its questioning of Tesla but its biggest alpha comes from his picks in small caps – see below for an excerpt on Tesla Inc (TSLA) from their July 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.
Yes, we remain short shares of Tesla, Inc. (TSLA), this bubble-market’s largest individual bubble, as well as the operator of what may be the world’s least efficient car factory which—according to new insurance industry crash tests— produces cars with a lower safety rating than many of its peers yet crash 37% more often with overall losses that are 124% higher.
Coho Capital 2Q20 Commentary: Podcasts, The New Talk Radio
Coho Capital commentary for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear Partners, Coho Capital returned 46.6% during the first half of the year compared to a loss of 3.1% in the S&P 500. Many of our holdings, such as Netflix, Amazon, and Spotify, were perceived beneficiaries Read More
Of course the big July event for Tesla was the “official” debut of the (already widely seen) Model 3, which will come in a base version with 220 miles of range (fewer than the Bolt’s 238) for $35,000 (if it’s actually made widely available) and a larger battery version with 310 miles of range starting at $44,000. For both cars, a package of heated power seats and upgraded audio costs another $5000, as does driver assist/Autopilot. More expensive AWD and “performance” versions will supposedly be available sometime next year. The positive news (for Tesla) from the event was:
Musk’s claim that they’ve had over 500,000 reservations (vs. the 400,000 consensus); however, it’s unclear if this is net of cancellations (and speaking of “cancellations” check out THIS ultimate sleaze move) and regardless, this is a statistic from before the (high) option pricing and (late) availability was announced
- Favorable reviews of the car from those who drove it at low speed around the Tesla factory neighborhood before having to extensively use the sightline-offset touchpad to control or view every function of the car, even something as mundane as the windshield wiper speed
The negative news from the event was:
- The above-noted touchscreen to control or view everything for the car is both inconvenient and outright dangerous
- As evidenced by comments on blogs & forums, the touchscreen, high option prices and late (if ever) availability of a $35,000 model and/or expiration of the $7500 tax credit subsidy will scare off a huge number of those who made deposits
- Musk warned multiple times of “hellish” production delays. (And keep in mind that delays and cost overruns have historically always been worse than he claims/predicts.)
A recent report from UBS thinks a high-volume, well-optioned Model 3 with the base battery could 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 in May wrote an article for Seeking Alpha incorporating that information to explain why despite (and partially because of) the Model 3, Tesla’s current $1 billion annualized operating loss is likely to 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. As noted above, I expect mass reservation cancellations to occur even before the $7500 tax credit phase-out begins in mid-2018. Have a look at the Model 3’s spartan dashboard vs its direct EV competitor the Chevrolet Bolt or the new $30,000, 50+ mpg, 850+ mile range (!) 2018 Honda Accord hybrid…
Or how about a $33,450 (before discounts) BMW 3-series?
Heck, even THIS interior seems safer and more user friendly than that of a Tesla Model 3:
Also in July, Tesla released its Q2 2017 delivery number, confirming zero growth (actually, a decline) over four consecutive quarters and thus proving that the market for its luxury EVs (Models S&X) is clearly saturated even before the arrival of the $35,000 less expensive Model 3 (which I expect to extensively cannibalize far more profitable Model S sales) or 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: 22,100
In fact, Q2 2017 was headed for a much worse sales comp vs. the previous three quarters when in mid-quarter moves of desperation Tesla slashed the price of the Model S75 by $7500 to $69,500 and brought back free lifetime Supercharging for buyers with (easily found) “referral codes.” (Say hello to an instant 2% margin hit for that one!) Then in June Tesla desperately offered multi-thousand dollar discounts (sometimes more than $10,000) on brand new inventory cars (see last month’s letter for details.) In May Tesla reported a disastrous Q1 with an operating loss of $258 million and a net loss of $330 million, and I expect Q2 (to be reported on August 2nd) to be even worse.
Also in July we also learned that Tesla’s latest battery cell, the 21700 made by Panasonic and used in the Model 3 (that’s right, Teslarians: Tesla doesn’t make its own batteries!) is already matched by or inferior to upcoming cells from LG and Samsung (and yet due to long-term “take or pay” contracts imposed on it by Panasonic, Tesla may actually now be among the industry’s highest-cost battery buyers). And we also learned that Toyota now expects to have EVs using solid-state batteries on the road within five years, thereby instantly turning any and all Tesla “gigafactories” into obsolete white elephants.
Also in July we learned of the departures of the key guys (Peter Rive and Jack West) in charge of developing the “solar roof tiles” (a hopelessly overpriced product I dissected several months ago) that were used to justify the SolarCity bailout. (Regarding those tiles, apparently last October’s debut was a complete fake designed solely to push through approval for the SolarCity merger and there’s very little happening at the factory—a New York State taxpayer boondoggle-- where they’ll allegedly be mass-produced.)
Finally in July there was this, which I present without further comment:
You can add the above-mentioned July SolarCity executive departures to a long list of recent escapees, including (in June) yet another Tesla “Head of Autopilot” (the second in six months), as well as three key engineers on the team plus (a few months previously) the “Head of Autopilot Hardware.” And as noted in previous letters, the excellent investigative journalists at Daily Kanban proved that the videos Tesla put out promoting its new autonomous system were hugely deceptive, and in May we learned that the CPU in Tesla’s hardware suite may be incapable of full autonomy despite Tesla charging $8000 up-front for that “future capability.” (Hello, “future class action lawsuit”!) In fact, 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 (note that the new Audi A8 is the world’s first production car with “Level 3”) 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 or that within a few years autonomy won’t be commoditized.
Meanwhile, Tesla’s “Supercharger moat” is now definitively being drained as Electrify America is building 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 (see the links below) will soon be gone. As for those “Tesla China factory” rumors (i.e., the search for a local JV partner to share half its losses), here’s a great story that puts it all in perspective.
And how is Tesla energy storage doing? (Because, you know, Tesla is really a battery company!) Well in Q1 total revenue was just $5.2 million (down 76% year over year!) at a double-digit negative gross margin. How’s that for “crazy off the hook”? (Storage revenue—but not profits-- should be up considerably later this year, as in July Tesla announced the sale of a big battery to Australia, a no-margin (or possibly negative margin) deal I estimate at around $25 million in revenue to Tesla). Meanwhile, Tesla battery cell supplier Panasonic (again, Teslarians: Tesla doesn’t make its own batteries) is going all out to supply its own batteries to all comers.
Meanwhile, Tesla also now faces significant class action lawsuits for sudden acceleration and defective regenerative braking, as well as 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”. Seeking Alpha published a terrific article about this specific to Tesla and soon Chinese producers will match or beat any price coming from the Gigafactory as China builds a vast number of new battery factories; in other words, watch out for a looming oversupply. And in June Audi revealed that its battery cost (probably at the cell level) for the long-range EVs it’s rolling out beginning next year is only around 100 euros per kWh, which (as noted earlier in this letter) may be significantly less than Tesla’s cost due to older “take or pay” commitments Panasonic demanded before installing its equipment in the Gigafactory. And as noted above,in five years solid-state batteries are likely to obsolete the Gigafactory anyway.
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…
And in China…
Here’s the competition in autonomous driving…
Audi and NVIDIA team up to bring fully automated driving accelerated with artificial intelligence
Here are the competing car batteries…
Here are the competing storage batteries…
And here are the competing charging networks…
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???
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 200-300-mile luxury EVs beginning in 2018 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.)
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 fully diluted 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 $60+ billion fully-diluted enterprise value and—thanks to its roughly $8 billion in debt—may eventually be worth “zero.”