Stanphyl Capital letter for the month of December 2018 discussing their short position in Tesla stock and the all-electric SUV competition that may hurt Tesla’s sales.
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:
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.
For several years now (in hindsight, several too many!) I’ve been arguing that TSLA bulls are confusing “luxury electric car loyalty” for “Tesla loyalty,” and that once superior European alternatives are available Tesla drivers will flock to them. Among those relatively near-term alternatives (out in late 2019) is the Porsche Taycan, and according to Porsche’s surveys guess who’s most interested in buying it? Yes, Tesla drivers. 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 just a few thousand dollars more than a base Tesla Model S and, among innumerable other advantages, will charge 2 ½ times as quickly. Hmm, Tesla or Porsche… Not a tough choice!
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, and this month came the first reviews (ahead of late-December European and April U.S. availability) of the Audi e-tron, an all-electric SUV with a bit over 200 miles of range vs. the 237-mile base Model X but with a much nicer interior and a price that’s over $9000 lower than the Tesla’s before the Audi’s $1875 to $7500 tax credit advantage. 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 a small electric crossover.
Meanwhile, available immediately is the new Jaguar I-Pace electric crossover (which received fabulous reviews, handily beating Tesla in comparison test after comparison test) and is $14,000 less than the Model X and $8000 less than the Model S, gaps that (as with the Audi) widen by an additional $3750 when Tesla’s tax credits begin phasing out this week 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 nearly equal to 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 probably 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. And by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.
Less expensive and available in early 2019 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 including 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).
In October Tesla reported the best quarter it will ever have (a GAAP profit of $312 million), and in 2019 it shall return to its money-losing ways. My October and November letters explain why Tesla’s 2019 GAAP loss will be at least in the hundreds of millions of dollars and perhaps over a billion dollars; rather than repeating that analysis here, please email me if you haven’t seen it and I’ll send you those letters. 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, and here’s 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, yet their massive exodus continues with the steady departure of multiple key accounting, production, and engineering people including, in December, the replacement of Tesla’s General Counsel with a prominent securities fraud criminal defense attorney. (Read into that what you will!) Rather than listing the never-ending stream of executive 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.
…and a desperate tweet from Fraud-Boy himself on the 31st, carnival barking like a late-night infomercial salesman…
…and finally from the 31st came this story from one of the Tesla shill-blogs…
I’ll take “the over” on that “over 3000”!
Many people argue that “truly massive” Model 3 demand will be unleashed if Tesla offers a shorter-range, lower-priced version in 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 unoptioned long-range rear-wheel-drive base car (recently discontinued) with an 80 kWh battery sold for $50,000 (including the delivery charge) and probably cost Tesla around $45,000 to build and sell. If Tesla cuts that battery size by 1/3 it will only save around $5000, so just to break even it would have to price the shorter-range car at around $40,000 (before options). 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 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 few thousand dollars 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 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.
Also in December, Tesla appointed two new SEC-mandated “independent” directors to its board, neither of whom know anything about manufacturing or distributing cars and both of whom (you can’t make this stuff up!) had major Theranos involvement, either personally (Larry Ellison) or corporately (Walgreen’s, from which Kathleen Thompson hails). And one of these “independent” directors (Ellison) was recently quoted as saying “I am very close friends to Elon Musk and I am a very big investor in Tesla.” That’s some real independence right there!“Zero Hedge” wrote a perfect summary of this debacle as did my friend Anton Wahlman.
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; 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!)
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 GM’s despite selling approximately 300,000 cars a year while Ford and GMmake 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.”
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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. -
Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver