Mark Spiegel’s biggest alpha comes from his picks in micro-caps which are under the radar – Indeed, 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 from Stanphyl’s latest letter to investors.
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As noted in previous letters, this year’s terrible performance has been primarily due to our short position in Tesla, whereby despite having an overwhelming number of facts on our side (detailed, as usual, below) the stock is up 45% this year. However, following a considerable amount of recent bad news for Tesla—much of which is discussed below—that trend may have finally reversed, with the stock now trading below its 200-day moving average for the first time since December 2016. Although as a value investor it’s been tough to find new companies cheap enough to buy in this free-money-driven “everything bubble,” we do have a number of short positions (detailed below) that I think will work out quite profitably. So let’s get to the specifics…
As noted above, we remain short shares of Tesla, Inc. (TSLA), which I consider to be the biggest single stock bubble in this whole bubble market—a company so landmine-filled that I think it can implode at any moment regardless of what the broad market does. To reiterate the three core points of our Tesla short position:
1) Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
2) Tesla loses a huge (and increasing) amount of money despite relatively light competition but will soon be confronted with massive competition in every aspect of its business.
3) Elon Musk is extremely untrustworthy.
In November Tesla reported an awful Q3, with a record quarterly loss of $619 million and over $1.6 billion in negative free cash flow. The company’s flagship Model S&X sales were up just 4.5% year over
year (hypergrowth!) despite massive discounting that drove automotive gross margin all the way down to 18.3%, a number already grossly inflated by Tesla’s non-standard calculation method, something I wrote about back in 2014. (Keep in mind that this drastic growth slowdown is occurring before the 2018/19 onslaught of luxury EV competition from Jaguar, Audi, Mercedes and Porsche.) Tesla also pushed back by three months its prediction of when it would be making 5000 Model 3s a week, a delay that wouldn’t be so bad if it weren’t complete and total bullshit. Additionally, the company refused to reiterate at all that it would be making 10,000 Model 3s a week by late 2018, despite Musk’s statement on the Q2 call just three months earlier that “what people should have absolutely zero concern about is that Tesla will achieve a 10,000 unit production week by the end of next year.” In fact, Tesla now admits that it hasn’t even begun to implement the capacity needed to enable such a production rate. (The discovery process during the multiple ongoing shareholder fraud lawsuits should be fun!) Zero Hedge published a great summary of the disastrous quarter as did Seeking Alpha from a slightly different angle, and the FT published a great piece about what a manufacturing disaster Tesla’s factory is. It’s also important to note that the battery storage division had a horrendous negative 33% gross margin, and I urge all of you to listen to the audio from the conference call (don’t just read the transcript!) as it’s one of the most (unintentionally) hilarious things you’ll hear all year!
Also in November, Tesla introduced a new Ponzi-powered Roadster (wire in your $50,000 to $250,000 in unsecured funds today for a car it may deliver some time between 2020 and “never” (my bet is on “never”) and a semi-truck with a range of 500 miles which Tesla claims will sell for around $180,000 (except for the $200,000 Ponzi edition) but I (and many others) estimate will cost at least $250,000 to build. Additionally, Tesla is guaranteeing to cap electricity rates at .07/kWh for the first million-miles of the truck’s usage; as national rates average around .12/kWh, I estimate this will cost Tesla—on average—an additional $100,000 for each truck it sells-- a typical Musk “business proposition” if I’ve ever heard one! And most hilariously, even if Tesla receives the pre-paid $250 million it’s targeting for 1000 “Founders Series” Roadsters, that money would cover only a bit over two weeks of its current cash consumption. Seeing as Tesla appears to have a destiny with bankruptcy, calling it the “Founders Series” seems rather appropriate:
so in November, the Republican members of the House released a tax reform plan that proposes to completely eliminate (as of January 1) the $7500 electric vehicle tax credit. If approved this will be a major negative for Tesla which—thanks to the existing plan’s gradual phase-out provision—was hoping buyers would be able to apply that credit to approximately 100,000 price-sensitive Model 3s in 2018. However, as the Senate bill leaves the credit untouched, it’s unclear how this will be resolved. Regardless, when the Model 3 eventually does go into real production it will be a huge sales disappointment, as reservation holders realize that only around 100,000 of them will qualify for that $7500 credit (if it continues to exist), and almost nothing can be done in the car without a multi-step process on the touchscreen—not even changing the windshield-wiper speed, adjusting the air vents or opening the glovebox. Thus, operating a Tesla Model 3 may potentially be as dangerous as texting while driving! And of course Tesla will make little (if any) money on the car, as it currently loses a fortune on models starting at twice the price. But hey, at least Musk is laser-focused on getting things corrected!
Also in November, three more senior Tesla executives departed—the Director of Battery Engineering, the President of Tesla Finance and the Vice President of Investor Relations. Seeing as there seems to be even more executive turnover at Tesla than in Kim Jong-un’s cabinet, how’s this for a slogan: “Tesla: We make North Korea look stable.”
Next in November, Tesla proudly announced that in Australia it installed the world’s largest battery energy storage project. What it didn’t announce is how much money it lost on this PR fluff project, considering that it had to buy the batteries from Samsung whose own energy storage division was happy to not match whatever low bid Tesla submitted!
Late in November, Reuters ran a story outlining what a manufacturing disaster Tesla is, with nearly all its cars requiring extensive repair work before being delivered to customers. Good thing the bulls think it’s an 18% gross margin, double-digit negative operating margin “tech company” and not a “car company”! Also in late November, a story broke in German media about Tesla committing fraud to qualify its cars for subsidies. (Ever hear “the cockroach theory” of investing? When it comes to corporate fraud, there’s never just one! Read the next paragraph and you’ll see what I mean…)
Back in October, Nvidia—the maker of the primary computer processor for Tesla’s so-called “Autopilot” system—announced mid-2018 availability for its first processor capable of full self-driving, thus providing further proof (in addition to the lack of necessary LiDAR) that since last year Tesla has been committing fraud in charging $8000 for “software upgradeable future full self-driving” for its current system. (And remember that in September Tesla’s SolarCity paid a $29.5 million fraud settlement. Once again, “the cockroach theory”!) In fact, Tesla is increasingly besieged by a wide variety of lawsuits, for labor discrimination, union-busting, autopilot fraud, sudden acceleration, lemon law violations, investor fraud and, undoubtedly, many others of which I’m not yet aware. And that’s even before it brings in the (inevitable) bankruptcy lawyers!
So here is Tesla’s competition in cars (note: these links are continually updated)…
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 (assuming 177 million shares “all-in”) now exceeds that of Ford and almost equals that of GM despite a nearly two-billion-dollar annualized net 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 $64 billion fully-diluted enterprise value and—thanks to its roughly $10 billion in debt—may eventually be worth “zero.”