Stanphyl Capital letter for the month of January 2019 discussing their short position in Tesla stock and Model 3 price difference as the company lost access to the $7500 U.S. tax credit.
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. As a reminder, 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.
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2) Tesla will again soon be losing a lot of money and has a terrible balance sheet despite relatively light competition, but is about to be confronted with massive competition in every aspect of its business.
3) Elon Musk is extremely untrustworthy.
In January Tesla reported an (unaudited) Q4 2018 GAAP profit of $139 million that (as anticipated) was considerably smaller than Q3’s never-to-be-topped and highly misleading (as explained in previous letters) figure of $312 million, and now (as ASPs decline and service expenses soar) the company shall slide back into losses. (I explain why below.) The conference call was filled with so much hilarity that it’s hard to pick a favorite example, but this quote from Elon Musk could be the winner…
“The demand for Model 3 is insanely high. The inhibitor is affordability. It's just like people literally don't have the money to buy the car. It's got nothing to do with desire. They just don't have enough money in their bank account.”
…and there were so many lies and obfuscations that the call must be heard to be believed (especially the surprise ending in which the CFO quits), but the key takeaway from the earnings press release is that the growth story is over, with Tesla guiding on the low end (the only end it ever even sometimes hits) to selling a total of 360,000 cars in 2019, representing zero-growth over the annualized pace of Q4 2018’s 90,000, while shrinking capex to an unsustainable level for any meaningful growth; thus, Tesla is now just another car company with a busted growth story.
Now here’s why Tesla will revert to losses for 2019: the company guided to a (desperately needed, based on currently awful customer service) opex increase of "less than 10%" in '19. Let's say it's 9% x the 2018 number of $4.43 billion = $400 million = $100 million/quarter. As noted above, Tesla also guided to annualized unit sales equal to those of Q4 2018, which had net income of $139 million. So before adjusting 2019 income for the far fewer (vs. Q4 2018) GHG credits that will be earned (due to far more sales overseas, where those credits aren’t earned), we derive just $39 million/quarter in 2019 earnings. However, after Q4 2018’s $94 million in GHG credits are halved (due to more sales overseas), that profit will be wiped out completely.
However, it's my (and many others’) opinion (based on terrible January U.S. demand and apparent weakness in European and Chinese orders) that Tesla will deliver far fewer than 360,000 cars this year- somewhere in the neighborhood of 250,000 is possible (including 3,S, & X), and I thus expect Tesla to revert to a massive GAAP loss of somewhere around $1 billion.
In fact, Tesla has hit such a demand wall (thanks in part to the January 1 halving of its $7500 U.S. tax credit, which is halved again in July and disappears at year-end) that it ended 2018 with many thousands of unsold cars in U.S. inventory and thus in January cut the Model 3’s price by $2000 and the 100kWh Models S&X by a massive $11,000 (while very slightly limiting their range via software) and eliminated the popular 75kWh models completely… Goodbye S/X volume and margins!
As a harbinger of the competitive forces to come for Tesla’s profitable high-end models, 2018 S&X sales in Europe would have been down 16% without the pull-forward demand from an expiring Netherlands tax break…
… and this was with just a few months of competition from Jaguar’s beautiful new i-Pace and before this year’s arrival of superior luxury EVs from Audi, Mercedes and Porsche (discussed below).
I’ve always argued that TSLA bulls are confusing “luxury electric car love” for “Tesla love,” and now that superior European alternatives are beginning to roll out, Tesla drivers will flock to them. Among those relatively near-term alternatives (out in late 2019) is the Porsche Taycan (here’s a great new video of it), and according to Porsche’s surveys it’s Tesla drivers who are most interested in buying it. After its U.S. tax credit price advantage over Tesla (whose credits will be gone at the end of 2019), the stunning, Autobahn and Nürburgring-tested Taycan will cost approximately the same as the least expensive Tesla Model S and, among innumerable other advantages, will charge 2 ½ times as quickly and, in the U.S., include three years of that charging as part of the purchase price. Hmm, Tesla or Porsche… Not a tough choice! In January Porsche announced that it has the capacity to build 40,000 Taycans a year, roughly the expected number of 2019 Model S sales before the Taycan steps in to steal pretty much all of them in 2020. In other words, Model S sales are about to be *so* dead.
The Taycan is just part of an onslaught of luxury EV competition about to rip the face off sales of Tesla’s most profitable models, the S&X. In March in Europe and April in the U.S. comes the Audi e-tron, an all-electric SUV with a much nicer interior (and better build quality!) than any Tesla and a price that’s around $13,000 lower than the Model X before the Audi’s (initial) $3750 to (eventual) $7500 U.S. tax credit advantage. (In fairness, the Audi’s range is expected to come in at around 220 miles vs. 270 miles for the X, but the Audi will charge faster.) The Audi received solid reviews (here, here, here and here), and three more electric Audis will follow the e-tron: the Sportback in late-2019 and, in 2020, the spectacular e-tron GT that recently debuted at the L.A. Auto show, as well as (in 2020) a small electric crossover.
Available immediately is the Jaguar I-Pace (which received fabulous reviews, handily beating Tesla in comparison test after comparison test) and costing $18,000 less than the Model X and $15,000 less than the Model S, price gaps that widen by an additional $3750 with Jaguar’s current U.S. tax credit advantage and escalate to $7500 in January 2020. I’ve driven the Jaguar and can assure you that no objective person will say it isn’t much nicer than any Tesla.
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 of around 225 miles and a price that will be around $25,000 (!) less than the Model X before the Mercedes’ $7500 U.S. tax credit advantage! And by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.
And let’s not count out BMW; here’s a fascinating interview with its head EV powertrain engineer and a preview of its upcoming 2021 i4.
Less expensive and available now are the excellent new all-electric Hyundai Kona and Kia Nero, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7500 U.S. tax credit. I expect these cars to have an immediate and severely negative impact on sales of Tesla’s Model 3 and a future severely negative impact on Tesla’s so-far unseen Model Y small crossover (assuming, of course, the latter makes it to market before Tesla declares bankruptcy).
Many people argue that “truly massive” Model 3 demand will be unleashed if Tesla offers a shorter-range, lower-priced version in late 2019 or early 2020; 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 $39,000 (without losing money) vs. Tesla’s original promise of $35,000 (before Tesla’s $1200 delivery charge). But Tesla is now choking on U.S. inventory of its “medium range” 264-mile Model 3 at a price $44,000 which—after its $3750 tax credit—costs the buyer only around $40,000. Yet in January 2020—soon after a $39,000 Model 3 might be introduced—that tax credit goes away completely, therefore making the base car’s (presumed) net cost to the buyer only $1000 less than the medium-range car for which demand has nearly evaporated despite 44 additional miles of range! The real mass-market Model 3 demand was for a $35,000 car 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.
And finally, here’s a January headline from a Bloomberg story that perfectly captures this semi-Ponzi scheme of a company:
That story derived from “groundbreaking day” of Tesla’s (so far unfinanced) Chinese factory, during which Musk blatantly lied about how long it would take to get things up and running, promising mass production by late 2019 while the site is a dirt field and anyone in the industry can tell you that—even in fast-moving China—it takes at least two years to build a new auto plant and install and calibrate the assembly line equipment, and that rapid timeframe is only for a company that knows what it’s doing, which Tesla most certainly does not.
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 market cap tops that of Ford and nearly matches 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 $60 billion enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”