Stanphyl Capital July 2018 letter to investors on Tesla Inc. (NASDAQ:TSLA)
See our full archive of Q2 letters right here
We remain short shares of (and long put options in) 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:
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Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
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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.
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3) Elon Musk is extremely untrustworthy.
On July 1st Tesla released horrendously bad Q2 delivery numbers, with a huge miss for the Model 3 (18,440 units sold vs. expectations of 25,000-30,000) and combined Models S&X deliveries roughly flat from a year ago and negative year-to-date. (Tesla will release its Q2 financial report on August 1st; I expect a record GAAP loss of around $800 million excluding ZEV credit sales.) Concurrent with the aforementioned Q2 delivery release (and in a Musk Tweet the night before), Tesla proudly proclaimed that it had produced nearly 7000 cars over the last seven days of the month. Closer examination by Reuters, however, confirmed the suspicion we raised in last month’s letter that such as pace was unsustainable and, most shockingly, Elon Musk ordered the factory not to perform an important brake test on the cars in order to meet his self-proclaimed production number. Is that (along with unleashing his reckless Autopilot and not recalling potentially dangerous suspensions) yet another sign that Musk a sociopath? (You can guess my answer!) And (as you’ll see a few paragraphs below) even at a July production average of fewer than 4000 a week, it appears that Tesla is already overproducing Model 3s relative to demand.
Before we dig more deeply into the Model 3, keep in mind that the aforementioned declining Model S&X delivery numbers come even before the widespread availability this September of the new Jaguar I-Pace electric SUV which received fabulous reviews (and handily beats Tesla in comparison tests) and is $13,000 cheaper than the Model X and $7000 less than the Model S, gaps that will widen substantially as Tesla’s tax credits phase out beginning in January (more on that below). And the Models S&X sales decline is also occurring before the near-term introduction of an onslaught of other luxury EVs in addition to the Jag— the Audi e-tron to be formally unveiled in September and available in Europe this winter and the U.S. next spring, the Mercedes EQC, also to be unveiled in September and available next spring, and the Porsche Taycan (previously called the Mission E), available late 2019. And all those cars (except the Porsche) will be priced significantly less expensively than the comparable Tesla even before their U.S. buyers enjoy the $7500 tax credit that will soon expire for Tesla, while the Porsche’s base price will be similar to that of the base Tesla Model S. Hmmm, Tesla or Porsche… tough choice!
In July Tesla announced that it has delivered its 200,000th car (since inception) in the U.S., meaning that after December 31st its $7500 tax credit will be cut to $3750 for six months, then $1875 for six months and then goes away completely. As this realization sinks into the minds of those awaiting the mythical $35,000 base-priced Model 3 (a car delayed multiple times already and now unavailable at least until sometime in 2019, if ever), look for an onslaught of reservation cancellations, as hinted in this fine article from the L.A. Times.
In fact, perhaps the biggest Tesla story this month is the seeming evaporation of Model 3 backlog, at least for the versions currently being sold with a starting price of $50,000. Tesla has now abandoned its “reservation list” and thrown open orders to all comers while (as evidenced in on-line forums) reducing the delivery time to as little as one month; here’s an excellent summary of that situation. In fact, in July two giant lots in California were discovered holding thousands of Model 3s baking in the sun, some of
which are covered with dust and seemingly haven’t moved for weeks. There are several possible explanations for that and none of them are good for Tesla.
The Model 3 will not be the savior of Tesla; in fact, regardless of whether Tesla hits its 5000 per week production goal (and Twitter user @skabooshka has gathered data indicating that July’s average weekly Model 3 production was under 4000), the car will be a financial disaster, with an EBIT break-even cost I estimate to be in the mid-$50,000s at best. And perhaps most laughably, Tesla is now using inexperienced employees from other departments to hand-build them! (Hey SEC: make sure Tesla allocates those solar, service tech and engineering salaries to “Cost of Automotive Sales” while those corporate transplants are working those assembly lines; otherwise it may try to further falsify its gross margin as it does with its warranty under-reserve!)
Meanwhile, extensive forum posts and reviews indicate that the Model 3 is revealing itself to be a complete lemon; here’s one small survey on a fanboy forum indicating (even with a heavy pro-Tesla sampling bias that likely includes a large percentage of shareholders) that 62% of them had at least one defect during the first 30 days of ownership…
…and Edmunds found the Model 3’s reliability to be disastrous. And when you do need service (and you will, regularly!) good luck getting it, with multi-week waits for appointments and multi-month waits for parts! And remember, almost nothing can be done in the Model 3 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.
Among other Tesla-related events in July, Musk inserted his name into the Thai cave rescue story by incessantly tweeting about a useless Thermos-like “mini-sub” he was building to “fly to the rescue” of the trapped soccer team. I normally wouldn’t cover this kind of self-promoting, circus-like event here as it’s peripheral to Tesla, but I really wanted an excuse to link to this hilarious 53-second clip of the chief diver expressing his opinion about Musk and his “invention.” In response to that comment Musk called the man a pedophile before being forced to issue a “ half-assed apology.” Then later in the month Musk—being the insecure, thin-skinned bully that he is— silenced one of Tesla’s most eloquent and financially sophisticated bears—a pseudonymous blogger using the name “Montana Skeptic”—by whining to his boss and having
his PR department reveal his true identity. Happily, the move backfired and was met with widespread ridicule.
Also in July Musk flew to China to announce that Tesla has received permission to build a wholly-owned factory in the Shanghai free trade zone. Omitted from this story, however, is the fact that cars built in Chinese free trade zones still must pay a 15% tariff if sold into the rest of the Mainland, putting them at a massive price disadvantage to joint-venture (or native) competitors. Also omitted from this
“announcement” was any mention of how broke-ass (sorry, I mean “nearly insolvent”) Tesla will finance this venture. In fact, this much ballyhooed announcement was so fundamentally important that Tesla never even filed an 8-K for it. And oh, by the way, China already has 487 electric-car makers. Have fun being #488, Tesla!
Also in July Tesla whistleblower Martin Tripp (who first came forward in June after being outed by the company itself) announced that a well-known attorney has agreed to take his case to the SEC on contingency (implying strong confidence in its veracity). Among Tripp’s allegations are that Tesla knowingly installed dangerously defective batteries in some of its Model 3s and lied to investors about the Model 3 production rate, thereby pumping its stock. Much of this is detailed in his defamation claim against Tesla, is pretty damn ugly and convincing. And you know that old expression about corporate malfeasance that says “there’s never just one cockroach”? Well this tweet was posted in early July by Mr. Tripp’s SEC lawyer…
…followed by this one a few weeks later:
If you recall, I wrote last month that Tesla may be under an undisclosed Wells Notice, and if that’s the case (and this is speculative) it may explain why it hasn’t been able to take advantage of its high stock price to raise fresh equity. In last month’s letter I included an interesting graphic layout of the circumstantial evidence for this; feel free to email me if you’d like to see it. At least part of the case may be related to Musk’s alleged commitment of securities fraud by using Tesla to bail out his (and his family’s) failing stakes in SolarCity; Zero Hedge included an excellent summary of this by Twitter user @TeslaCharts in this story about SolarCity’s latest retrenchment, which will undoubtedly help fuel the fraud case currently working its way through a Delaware court, as will this later story describing how Tesla sales people have no idea when the solar tiles or PowerWalls used to justify that merger will ever be available. (Remember that when Musk was promoting that merger he used fake solar tiles on a fake house at a movie studio… How appropriate!)
Also in July a memo leaked to the Wall Street Journal revealed that Tesla is begging its suppliers for retroactive rebates, calling the needed cash “essential to Tesla’s continued operation.” Tesla’s vague response to the story seemed to indicate that it revolved around slashing capex, both retroactively and going forward. (Goodbye growth story!) In fact, Tesla is now in such bad financial shape that all sorts of liens are piling up against it in its home county of Alameda.
Also in July it was announced that Tesla chief automotive engineer Doug Field was officially quitting his job after taking an undetermined leave of absence earlier in the year. He joins a long line of departing Tesla executives— a list so long that Jim Chanos recently said that the only other times he’d seen anything like it was during the waning days of Enron and Valeant. Congratulations, Tesla: you’re a company in great company!
Meanwhile, Tesla is increasingly besieged by a wide variety of lawsuits for securities fraud, labor discrimination, worker safety, union-busting, sudden acceleration and lemon law violations, new ones appear on a regular basis.
Finally (before our regular monthly links), I leave you with my favorite Tesla chart for July:
So here is Tesla’s competition in cars (note: these links are continually updated)…
Jaguar Electric I-Pace SUV Available Summer 2018
2019 Jaguar XJ to be reborn as high-tech electric flagship Jaguar Land Rover will boost spending to $18 billion to fund EVs
2019 Audi E-Tron To Charge Faster Than Tesla Supercharger Network Audi e-tron Sportback in 2019 to be its second EV
Porsche Cross Turismo to be its second EV Mercedes 2019 EQC To Be Unveiled This September
Mercedes Plans Electric S-Class to Challenge Tesla’s Flagship
Mercedes Wheels Out Electric Car Roadmap, Car And Battery Factories Everywhere 2019 Hyundai Kona Electric gets 250-mile range rating in the U.S.
14 new EV models by Hyundai-Kia by 2025
Chevrolet Bolt Offers 238 Miles On A Single Charge For $37,495
GM to introduce 3 more electric cars before 2020, battery cells at <$100/kWh 2018 Nissan Leaf: 150 miles for $30,875, 200+ mile model by late 2018 Nissan Leaf-based SUV coming in 2020
Volvo Polestar 2: 350-mile range, £30,000 starting price
Volvo To Start Selling Electric Trucks In 2019, Some Will Hit The Road This Year VW will build EVs in 16 factories in zero emissions push
Volkswagen I.D. Crozz 311-Mile Electric CUV For $30,000-ish Before Incentives VW’s All-Electric I.D. Vizzion Coming With 400 Miles of Range
BMW will export iX3 electric SUV to Europe, U.S. from China BMW Confirms The i4 EV
BMW to have 25 electrified models by 2025
Ford plans $11 billion investment, 40 electric vehicles by 2022
Toyota, Mazda, Denso create company to roll out electric cars beginning 2019 Toyota to market over 10 battery EV models in early 2020s
PSA will launch full-electric Peugeot 208 and DS 3 Crossback in 2019 ALL-ELECTRIC MINI COOPER COMING IN 2019
Smart Will Electrify Its Entire Line-up By 2020
SEAT’s first electric car is due in 2020 Opel will launch full electric Corsa in 2020
2019 Skoda e-Citigo confirmed as brand’s first all-electric model Skoda planning range of hot all-electric eRS models
MG E-Motion confirms new EV sports car on the way by 2020 Aston Martin to create all-electric car brand
Fiat Chrysler bets on electrification for Alfa, Jeep and Maserati
Maserati to take on ‘Porsche and Tesla’ with Alfieri, new SUV and four EVs Renault prepares to double production of Zoe EV
Rolls-Royce is preparing electric Phantom for 2022
Citroen preparing EV push with 80 per cent electrified range by 2023 Honda will offer full-EV or hybrid tech on every European model by 2025 All-electric Bentley four-door coupe to use EV tech from Porsche Mission E Subaru to introduce all-electric vehicles by 2021
Ssangyong e-SIV concept previews 2020 EV Dyson plans three-car EV range
235mph Lucid Air due in 2019 as electric BMW 7 Series rival Borgward BXi7 Electric SUV Flies Under The Radar
Detroit Electric promises 3 cars in 3 years
SF Motors reveals two electric SUVs for 2019 with 300 miles of range
Two new electric cars from Mahindra in India by 2019; Global Tesla rival e-car soon Saab asset owner NEVS plans electric car production
EVelozcity Raises $1 billion For EV Startup
Flush with new cash, electric-car company Faraday Future hopes for a fresh start
And in China…
Daimler & BYD launch new DENZA electric vehicle for the Chinese market BAIC and Daimler to Build $1.9 Billion China Plant
Daimler and Baidu to Enhance Strategic Cooperation in Automated Driving
Volkswagen makes €15bn bet on electric cars in China
Volkswagen Group China’s mega-factory in Foshan will strengthen e-mobility strategy in China VW signs deals for EVs, autonomous driving in China
Audi to launch 7 new energy vehicle models in China by 2020
GM China raises new-energy vehicle target to 20 models through 2023 Nissan & Dongfeng to invest $9.5 billion in China to boost electric vehicles Toyota to Introduce 10 New Electrified Vehicles in China by 2020
Infiniti bringing EVs to China’s luxury car market
BMW will develop and produce electric Mini in China Ford ramps up electric vehicle push in China
China’s BYD tops global electric-car production for third year in a row SAIC to spend $2.2 billion on EVs, connectivity, aftersales services
Honda debuts Everus electric car for China Changan building large scale NEV factory
Mazda and Changan Auto join hands on electric vehicles
WM Motors/Weltmeister EX5 Electric SUV Launched On The Chinese Car Market NIOS ES8 Electric Crossover debuts with half the Tesla Model X’s price tag
Geely invests $5 billion into new electric car factory in China Chery Breaks Ground on $240M EV Factory in China Chery’s second EV plant open in Dezhou
Leapmotor’s electric car to hit the market in 2018
Alibaba-backed Xiaopeng Motors to raise US$2.7 billion this year GAC Trumpchi to launch range-extended EVs
Guangzhou Auto To Launch Four New Electric Cars By 2020
Chinese carmaker Byton unveils its fully autonomous rival to Tesla’s electric sedans Chinese-backed electric car start-up Byton woos CES with model 40% cheaper than a Tesla Great Wall Starts New EV Brand (ORA) In China
Singulato iS6 Electric SUV Debuts With 249-Mile Range Singulato, BAIC partner to promote smart new energy vehicles FAW (Hongqi) to roll out 15 electric models by 2025
JAC’s Electric Car Has A Range Of 500 Kilometers
ICONIQ to build electric cars in Zhaoqing with total investment of RMB 16 billion Quianu Motor aims to grab share of US electric vehicle market
All-electric NEVS 9-3 sedans (nee Saab) being built in China
Youxia Motors Secures USD794 Million to Push Release of New Connected Cars Wanxiang Gets China Electric Vehicle Permit to Make Karma Cars
Qoros Auto’s new owner plans to be an EV power
JMC (Jianling Motor Corp.) Starts New EV Brand In China Thunder Power electric cars at the Frankfurt motor show Continental, Didi sign deal on developing EVs for China
Here’s Tesla’s competition in autonomous driving…
Tesla Ranks Last for Automated Driving
A Tesla self-driving blind spot that few are focusing on
Waymo is first to put fully self-driving cars on US roads without a safety driver Jaguar and Waymo announce an electric, fully autonomous car
Waymo Expands Chrysler Self-Driving Fleet 100-Fold to 62,000 Uber, Waymo in talks about self-driving partnership
Lyft and Waymo Reach Deal to Collaborate on Self-Driving Cars
Cadillac Super Cruise™ Sets the Standard for Hands-Free Highway Driving GM ride-hailing fleet would ditch steering wheel, pedals in 2019 SoftBank Vision Fund to Invest $2.25 Billion in GM Cruise
An Overview of Audi Piloted Driving
Updated 2017 Mercedes-Benz S-Class – first ride with autonomous technology Nvidia to test fleet of robotaxis in 2019 with Daimler, Bosch
NVIDIA and Toyota Collaborate to Accelerate Market Introduction of Autonomous Cars
Volkswagen and NVIDIA to Infuse AI into Future Vehicle Lineup
Continental & NVIDIA Partner to Enable Production of Artificial Intelligence Self-Driving Cars Bosch and Daimler join forces to market fully automated, driverless taxis by 2020
Intel’s Mobileye will have 2 million cars (VW, BMW & Nissan) on roads building HD maps in 2018
Volkswagen Group and Aurora Innovation Announce Strategic Collaboration On Self-Driving Cars Toyota, Intel and others form big data group for autonomous tech
Toyota Adds $2.8 Billion to Software Push for Self-Driving Cars Nissan’s Robo-Taxis Will Hit the Road in March
Nissan and Mobileye to generate, share, and utilize vision data for crowdsourced mapping Magna joins the BMW Group, Intel and Mobileye platform as an Integrator for AVs
Intel collaborates with Waymo on self-driving compute design
Fiat Chrysler to Join BMW, Intel and Mobileye in Developing Autonomous Driving Platform Ford-Backed Driverless-Car Startup Argo AI Lures Talent
Ford to invest $4 billion in new self-driving vehicle unit
Lyft, Aptiv (formerly Delphi) partner on driverless ride-hailing at 2018 CES in Vegas Lyft, Magna in Deal to Develop Hardware, Software for Self-Driving Cars
Hyundai, Aurora to release autonomous cars by 2021
Deutsche Post to Deploy Test Fleet Of Fully Autonomous Delivery Trucks This Year Byton cooperating with Aurora on autonomous vehicles
Magna’s new MAX4 self-driving platform offers autonomy up to Level 4 Bosch Creates a Map That Uses Radar Signals for Automated Driving Honda Targeting Level 3 Automated Driving By 2020, Level 4 by 2025
Groupe PSA’s safe and intuitive autonomous car tested by the general public
Baidu unveils autonomous driving platform backed by 90 global partners Baidu plans to mass produce Level 4 self-driving cars with BAIC by 2021
BlackBerry and Baidu Partnering to Accelerate Connected and Autonomous Vehicle Technology Tencent, Changan Auto Announce Autonomous-Vehicle Joint Venture
JD.com Delivers on Self-Driving Electric Trucks NAVYA Unveils First Fully Autonomous Taxi
Fujitsu and HERE to partner on advanced mobility services and autonomous driving Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology
First Look Inside Zoox’s Autonomous Taxi
Apple Is Focusing on Making an Autonomous Car System Samsung, Harman gear up for self-driving automobiles
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
Nuro’s Robot Delivery Vans Are Arriving Before Self-Driving Cars
Here’s Tesla’s competition in car batteries…
LG Chem targets electric car battery sales of $6.3 billion in 2020
LG Chem to build $1.8 bln EV battery plant in China
Samsung SDI Unveils Innovative Battery Products at 2018 Detroit Motor Show
SK Innovation to produce EV batteries with 500 km range in 2018
New Toshiba EV Battery Allows 320km Charge in 6 Minutes Daimler building eight battery factories
Panasonic Opens New Automotive Lithium-Ion Battery Factory in Dalian, China Panasonic forms battery partnership with Toyota
CATL’s Chinese battery factory will be bigger than Tesla’s Gigafactory
CATL to set up battery cell manufacturing in Germany
BYD to quadruple car battery output with lithium site plants GM inaugurates battery assembly plant in Shanghai
Honda Partners on General Motors’ Next Gen Battery Development Energy Absolute Plots Asian Project Rivaling Musk’s Gigafactory European Battery Alliance (EBA) is taking shape
ABB teams up with Northvolt on Europe’s biggest battery plant Chinese Battery Maker to Open Factory Next to Swedish EV Plant
Sokon aims to be global provider of battery, electric motor, electric control systems BMW Group invests 200 million euros in Battery Cell Competence Centre
BMW Brilliance Automotive opens battery factory in Shenyang BMW announces partnership with solid-state battery company Toyota promises auto battery ‘game-changer’
VW increase stake in solid-state batteries with $100M investment Hyundai Motor developing solid-state EV batteries
Continental eyes investment in solid-state batteries Wanxiang is playing to win, even if it takes generations
UK provides millions to help build more electric vehicle batteries Rimac is going to mass produce batteries and electric motors for OEMs
Elon Musk Has A New Battery Rival (Romeo Power) Packed With His Ex-Employees Bracing for EV shift, NGK Spark Plug ignites all solid-state battery quest
ProLogium Technology Will Produce First Next Generation Lithium Ceramic Battery For EVs
Here’s Tesla’s competition in storage batteries…
Panasonic
Samsung
LG
BYD
AES + Siemens (Fluence)
GE
Bosch
NEC
Hitachi Chemical
Toshiba
ABB
Saft
EnerSys
SOLARWATT Schneider Electric sonnenBatterie Kokam
Sharp
Eaton
Nissan
Tesvolt
Kreisel Leclanche Lockheed Martin
UniEnergy Technologies electrIQ Power Belectric
Sunverge Stem ENGIE Exergonix Redflow Renault
Simpliphi Power redT Energy Storage Murata Bluestorage
Adara Blue Planet
Clean Energy Storage Inc. Swell Energy
Tabuchi Electric Younicos Orison
Moixa Powin Energy Nidec Powervault Schmid
24M Terra E Eelpower Ecoult
And here’s Tesla’s competition in charging networks…
EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US Tritium’s First 350-kW DC Fast Chargers Coming To U.S.
Porsche plans network of 500 fast chargers for U.S.
BMW, Daimler, Ford, VW, Audi & Porsche form IONITY European 350kw Charging Network E.ON to have 10,000 150KW TO 350KW EV charging points across Europe by 2020
Enel kicks off the E-VIA FLEX-E project for the installation of European ultra-fast charging stations Europe’s Allego “Ultra E” ultra-fast charging network now operational
Allego & Fortum Launch MEGA-E High Power Charging network for Europe’s Metropolitan areas
Chargepoint Europe Gets $82 million in new funding from Daimler ChargePoint – InstaVolt partnership; more than 200 UK rapid charge systems UK’s Podpoint installing 150kW EV rapid chargers this year; 350kW by 2020 UK National Grid plans 350kW EV charge point network
ChargePoint Express Plus Debuts: Offers Industry High 400 kW DC Fast Charging Fastned building 150kw-350kw chargers in Europe
ABB powers e-mobility with launch of first 150-350 kW high power charger Shell buys European electric vehicle charging pioneer NewMotion
BP buys UK’s largest car charging firm Chargemaster Total planning EV charging points at its French stations
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
Elon Musk, June 2009: “Tesla will cross over into profitability next month”
Tesla SEC Correspondence Shows A Pattern Of Inaccurate, Incomplete & Misleading Disclosures Tesla: Check Your Full Self-Driving Snake Oil Expiration Date
As Musk Hyped and Happy-Talked Investors, Tesla Kept Quiet About a Year-Long SEC Probe The Truth Is Catching Up With Tesla
With Misleading Messages And Customer NDAs, Tesla Performs Stealth Recall Who You Gonna Believe? Elon Musk’s Words Or Your Own Lying Eyes?
How Tesla and Elon Musk Exaggerated Safety Claims About Autopilot and Cars When Is Enough Enough With Elon Musk?
Musk Talked Merger With SolarCity CEO Before Tesla Stock Sale Debunking The Tesla Mythology
Tesla Continues To Mislead Consumers
Tesla Misses The Point With Fortune Autopilot Story
Tesla Timeline Shows Musk’s Morality Is Highly Convenient
Tesla Scares Customers With Worthless NDAs, The Daily Kanban Talks To Lawyers Tesla: Contrary To The Official Story, Elon Musk Is Selling To Keep Cash
Tesla: O, What A Tangled Web We Weave When First We Practice To Deceive I Put 20 Refundable Deposits On The Tesla Model 3
Tesla’s Financial Shenanigans Tesla: A Failure To Communicate Can You Really Trust Tesla?
Elon Musk Appears To Have Misled Investors On Tesla’s Most Recent Conference Call
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 tops that of Ford and nearly equals GM’s despite a $2.8 billion+ annualized net loss selling approximately 200,000 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 over $60 billion fully-diluted enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”
