Excerpt from Stanphyl Capital’s letter for the month of November 2018, discussing Tesla’s Q3 earnings report and the Model 3 demand.
We remain short stock and call options in Tesla, Inc. (TSLA), which I consider to be the biggest single stock bubble in this whole bubble market. The three core points of our Tesla short position are:
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1) Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
2) Tesla will again soon be losing a lot of money and has a terrible balance sheet 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 October Tesla reported a surprisingly good (based only on the headline numbers!) Q3 earnings report, showing a GAAP profit of $311.5 million. It was also the best quarter Tesla will ever have, as in 2019 the company shall return to its money-losing ways. My October letter (written before Tesla released its 10-Q) contained a detailed analysis as to why I believed Tesla would show a GAAP loss of around $400 million next year. (Here’s a link, courtesy of ValueWalk.) However, after reading the 10-Q (released in November) and researching the emissions credits which contributed to most of Tesla’s Q3 income, I upped that loss estimate by at least $200 million (to $600 million) as the Model 3 sales mix shifts overseas where U.S. credits aren’t earned. Additionally (and even more importantly) I now believe Tesla is massively under-reserving for future warranty expense, and by “massively” I mean at a rate of approximately $200 million per quarter (I explain why in this Twitter thread), and if Tesla is forced to correct this its 2019 GAAP loss will be well over $1 billion even before hundreds of millions of dollars in potential lawsuit settlements. And to kick off Tesla’s awful 2019, here’s a great explanation as to why Q4 2018 (the one we’re in now) will be worse than Q3, along with a great take on how really bad Q1 2019 will be.
But lest you believe Q3 really did mark a significant and lasting turnaround for Tesla, keep in mind that no group has a better grasp of a company’s prospects than its executives, and yet their massive exodus continues, with the departure of multiple key accounting, production, and engineering people. Rather than listing the never-ending stream of new departures here, please use this link to see the astounding full list. Many of these people left millions of dollars in unvested stock on the table, and one must ask why. Do they assume that stock will wind up worthless? Were they asked to do things they were “uncomfortable” doing? Or is Elon Musk just so difficult to work for that it isn’t worth the millions of dollars they left behind? None of the answers to those questions are favorable to Tesla. While a couple of low-level whistleblowers have come forward publicly to report on internal dirty deeds at Tesla, with that many high-level departures I have no doubt that myriad more significant whistleblowers are doing the same.
Perhaps the most important ongoing Tesla story is the evaporation of North American Model 3 backlog. Despite Q3 production averaging just 4100 Model 3s per week (far short of the anticipated 5000 per week and Musk’s near-term goal of 6000), in mid-October Tesla began offering a slightly shorter-range (260 mile) Model 3 with a $3000 price cut vs. battery production savings I estimate at just $1500; in other words, Tesla is taking a $1500 per car margin hit. It also slashed the price of its AWD model by $1000 and cut the price of its most fully-equipped “Performance” model by $5000, thus causing thousands of Q3 (and early Q4) Performance buyers to scream in protest and thereby force Elon Musk to promise them $5000 refunds. (As an aside, Tesla also slashed prices in China this month (thereby killing its margins) to compensate for a plunge in sales due to higher tariffs there.)
Many people argue that “truly massive” Model 3 demand will be unleashed when Tesla offers an even shorter-range, lower-priced version in mid-2019; here’s why I think that’s wrong… First, I can’t see any way that a short range (approximately 220-mile) base car can be priced at less than $40,000 (including Tesla’s $1200 delivery charge) vs. Tesla’s original promise of $35,000 (a price which has now been scrubbed from Tesla’s web site). After all, the current base car with an 80 kWh battery sells for $50,000 (including the delivery charge). If Tesla cuts that battery size by 1/3 (25 kWh) it will only save around $5000, and if it then accepts a 10% cut in gross margin (to probably near-zero on an un-optioned base model), it would have to price the shorter-range car at around $40,000. Now let’s put that in perspective…
Tesla recently sat with piles of unwanted long-range (310 mile) rear-wheel drive Model 3 inventory at a net customer base price of $42,500 ($50,000 minus a $7500 tax credit); in fact, after it ran through over two years of order backlog in Q3, demand became so low for that model that Tesla has now eliminated it completely, mandating the purchase of all-wheel drive with the largest Model 3 battery pack. So if a small-battery Model 3 with 90 fewer miles of range will cost $40,000 (my estimate) and only come with an $1875 credit beginning in July (and no credit at all beginning January 2020), why would there be door-busting demand for a $38,175 ($40,000 in January 2020) 220-mile car when there was a glut of 310-mile cars at $42,500? When financing a car, who wouldn’t pay an extra $2500 for an extra 90 miles of electric range? And yet Tesla’s North American backlog of those buyers is gone. The real mass-market Model 3 demand was at $35,000 with a $7500 tax credit—a fictional product that Musk lied about to do massive capital raises in 2016 and 2017.
Meanwhile, the Model 3 continues to reveal itself to be a complete lemon (one that’s particularly disastrous in the winter), with the latest survey from True Delta ranking it dead last among all available vehicles. And in September British magazine What Car? ranked overall Tesla reliability so low that it’s in “a league” of its own. And speaking of lemons, although the latest Consumer Reports survey doesn’t have enough Model 3 data to provide a reliability estimate other than “average,” it downgrades the Model S to “worse than average” and thus “unacceptable” while the Model X is once again rated “much worse than average” and makes the “coveted” “10 Least Reliable Cars” list.
In November (as part of its settlement with the SEC over Musk’s fraudulent “420” Tweets) Tesla appointed Robyn Denholm as its mandated “independent” Chairman, someone who had already been on the board for over four years and was installed by Musk… That’s some “independence”! Meanwhile the “420 tweets” triggered an onslaught of lawsuits with a billion-dollar plus liability from investors who bought stock anticipating a buyout, and none of that (nor simultaneous SEC & DOJ investigations into fraudulent Model 3 production figures Musk used to sell a 2017 bond offering) went away with the SEC settlement.
In October (in a move likely forced by SEC or DOJ regulators) Tesla withdrew a $3000 option for “future full self-driving” that it offered since 2016 despite every expert in the field of autonomy saying was years from being possible and unlikely to occur with Tesla’s no-LiDAR hardware suite. If this vaporware product had 20% buyer uptake, it means Tesla now owes around $150 million in refunds and loses a nice ongoing source of gross margin. Additionally, Tesla is open to massive lawsuit claims from people who bought their $100,000 car only because they anticipated receiving “full self-driving” capability, something Musk claimed since 2016 was right around the corner; thus the liabilities for this fraud could run into hundreds of millions of dollars.
Meanwhile there’s an onslaught of luxury EV competition about to rip the face off sales of Tesla’s most profitable models, the S and X. First, the new Jaguar I-Pace electric crossover (which received fabulous reviews, handily beating Tesla in comparison test after comparison test) is now available in Europe and the U.S. for $14,000 less than the Model X and $8000 less than the Model S, gaps that will widen substantially as Tesla’s tax credits begin phasing out in January. I’ve driven the Jaguar and can assure you that no objective person will say it isn’t much nicer than any Tesla.
In December in Europe and April in the U.S. comes the Audi e-tron, an all-electric SUV with roughly the same estimated EPA range as the 237-mile base Model X but with a much nicer interior and a price that’s over $9000 lower before the Audi’s tax credit advantage. When the Audi arrives in the U.S. it will receive a tax credit that’s $3750 better than Tesla’s, thus stretching its price advantage to almost $13,000, and that advantage will grow to almost $15,000 in July when Tesla’s credit is reduced to just $1875 vs the full $7500 for the Audi. Then two more stunning electric Audis will follow the e-tron, in late-2019 & late 2020.
The Mercedes EQC all-electric SUV will be available in Europe in mid-2019 and in the U.S. in early 2020, with an EPA range nearly that of the base Tesla Model X (an estimated 225 miles vs. 237 for the Tesla) at a cost that’s approximately $26,000 less, as the Mercedes will sticker at around $65,000 and get a full $7500 tax credit while the Model X starts at $84,000 and will get no tax credit when the Mercedes arrives. (As an aside, by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.)
Although the Model X is larger than the Mercedes and Audi (and has optional third row seating and for $99,500 can take its range up to 295 miles), it had previously been the only luxury electric SUV, leaving buyers with no choice in that category. Now there are alternatives for those who prefer a smaller, easier-to-park vehicle with a much nicer interior and vastly better service facilities, as well as more practical doors than the Tesla’s oft-malfunctioning “falcon wings” (which prevent the ability to mount a rooftop storage unit, something both the Mercedes and Audi can do). I thus expect buyers will flee en masse from the “X” to the nicer and much less expensive Audi and Mercedes, while the Jaguar—more of a crossover than an SUV—will provide terrific competition for both the Model X and the Model S.
Next in luxury EV competition for Tesla will be the Autobahn and Nürburgring-tested Porsche Taycan, which is available in 2019 with a base price similar to that of the base Model S, and thus may be less expensive with the advantage of the tax credit Tesla soon loses. Hmmm, Tesla or Porsche… tough choice!
Meanwhile Tesla continues to downsize its SolarCity division while a civil securities fraud case accusing Musk of using Tesla to bail out his (and his family’s) interests there proceeds; earlier this year Zero Hedge included an excellent summary of the suit by Twitter user @TeslaCharts in this story about SolarCity’s latest retrenchment which will undoubtedly help fuel that fraud case, 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!)
Finally, 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, and new ones appear on a regular basis. In fact, one could even argue that Tesla is a criminal enterprise.
So here is Tesla’s competition in cars (note: these links are continually updated)…
Audi e-tron GT enters production late 2020
240-Mile Kia Niro EV Arrives January 2019 at Under $40,000
Chevrolet Bolt Offers 238 Miles On A Single Charge For $37,495
Bentley mulls electric car to help reduce carbon footprint
Detroit Electric promises 3 cars in 3 years
And in China…
Volkswagen Group China’s mega-factory in Foshan will strengthen e-mobility strategy in China
Mazda and Changan Auto join hands on electric vehicles
Here’s Tesla’s competition in autonomous driving…
An Overview of Audi Piloted Driving
Volkswagen and NVIDIA to Infuse AI into Future Vehicle Lineup
Volkswagen Group and Aurora Innovation Announce Strategic Collaboration On Self-Driving Cars
Toyota Invests $500 Million in Uber to Get Self-Driving Cars on the Road
Hyundai, Aurora to release autonomous cars by 2021
Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology
Here’s Tesla’s competition in car batteries…
Here’s Tesla’s competition in storage batteries…
Clean Energy Storage Inc.
And here’s Tesla’s competition in charging networks…
Recargo Ultrafast West Coast Charging
Enel kicks off the E-VIA FLEX-E project for the installation of European ultra-fast charging stations
Fastned building 150kw-350kw chargers in Europe
ABB powers e-mobility with launch of first 150-350 kW high power charger
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”
How Tesla and Elon Musk Exaggerated Safety Claims About Autopilot and Cars
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 GM’s despite selling approximately 300,000 cars a year while Ford and GM make billions of dollars selling 6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its roughly $70 billion enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”