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Time To Short? Whitney Tilson “Today I’m Making One Of My Rare Big Calls: We Will Look Back On Last Friday As The Beginning Of The End For Tesla’s Stock”

From Whitney Tilson‘s latest email to colleagues on everything Tesla, Inc. (NASDAQ:TSLA).

Ever since I got burned shorting Tesla in 2013, as it ripped from $35 to $205, I’ve been warning about the perils of shorting the stock. Elon Musk and his team have pulled too many rabbits out of their hat to bet against them.

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the standard range Model 3

I’m also an admirer of the company and, mostly, of Musk. While he too often behaves like a narcissistic brat, he’s undeniably an incredible entrepreneur with a remarkable track record. Nearly single-handedly, he’s forced one of the world’s largest industries to invest heavily in electric cars – and humanity will be the better for it. Ditto for SpaceX and the rocket/space launch industry.

As for Tesla’s stock, however, I’ve been following it closely for years and, after carefully reviewing everything over the weekend (including the transcript of Musk’s blatantly-Reg-FD-violating call last week), today I’m making one of my rare big calls: we will look back on last Friday as the beginning of the end for Tesla’s stock.

I think Musk has no more rabbits to pull out of his hat and therefore it’s all downhill from here. I predict that by the end of the year, the stock, today at $295, will be under $100.

I don’t make calls like this very often. The last two were bitcoin the hour it peaked at $20,000 on December 16, 2017 (click here to read the email I sent then) and Tilray (TLRY) the hour it peaked at $300 last September 19 (click here and here to read the emails I sent that day).

I only make big calls when three things like up perfectly to create what I call an “inflection point”: the fundamentals, my “scuttlebutt” research, and my read of investor sentiment.

In the case of Tesla, the fundamentals are terrible, the research provided on Twitter and elsewhere by a small army of amateur analysts reveals that demand is weak and inventories are piling up, and I sense that the number of investors who are losing confidence in Musk is finally exceeding those who are drinking his Kool Aid (like these guys). (Here’s a funny 3:38 video someone made of the fast one they think Musk is pulling.)

Before I outline the bear case, it’s only fair to present the bull case: just pick up pretty much any analyst report or read why famed short seller Andrew Left turned around and went long Tesla last October: Citron Reverses Opinion on Tesla.

As for the bear case, below are the smartest comments I’ve read from various folks, most of whom posted on the ValueInvestorsClub message board, where the best discussion of the stock is taking place (the full site is available only to members, but you can sign up for free for 45-day-delayed guest access here).

1) If Tesla had any positive card to play, they would have played it on Thursday afternoon in order to soften the blow. I think this means they are out of bullets.

As a result, I now think that the risk/reward of being short has improved dramatically from where it was by Thursday morning.

It looks like the street consensus for the quarter is 81,000 cars sold (down 10,000 from Q4). The street-low is 79,000. My estimate remains around 75,000. Still, I now think that the debate will move away from units sold to profitability and balance sheet. And if that's the case, Tesla's stock price is toast.

2) They are closing their worldwide physical presence. They are firing more staff (3rd time in 8 months), again after Elon said it would never happen again (for the second time). They are cutting prices across their entire range, again (not just Model 3). They are saying they will not make money in Q1 (even with the cream of European/Chinese Model 3 high ASP orders) - meaning they will likely never make profits again, ever. They are impairing 000s of their own inventory and lease assets by rushing forward lower-priced everythings to get cash in the door, likely doing permanent brand damage. They may have implicitly shown they are unable to raise equity...

3) They also warned on earnings for Q1.

They also announced the new delivery version is so gruesome that they aren't allowing test drives or vehicle inspection (you just order away and hope it comes with the pieces assembled).

They also announced they are closing their stores and firing thousands of people (do they even have enough liquidity to pay severance + lease termination fees??).

They also won't be doing any vehicle servicing going forward. When your lemon dies, it rots in your driveway while you constantly text a TSLA rep who doesn't respond. Saves them the headache of having to find new storage space for all the bricked out cars at service centers now (bad for the brand when you have to park customer cars on sidewalks b/c you can't repair them).

Finally, they cut pricing on all cars across the board. It now costs a bunch less to own a fraudmobile. Just visit your local SHLD parking lot and choose a mismatched color panel scheme that appeals to you....

4) This really did show some huge cracks in the armor. I reckon Panasonic pushing back and saying they will enforce the purchase obligations - meaning this really could get messy pronto if demand even at $35k disappoints. They are releasing this model simply to move metal, generate cash even at negative gross margin and thus fulfill the battery purchase obligations...guidance cut and your many other good points aside, this suggests to me that the cash crunch (and inability to solve it by tapping equity markets) is real. I think they file before year end.

5) Today's "announcement" reeked of desperation.

For starters, it clearly wasn’t planned out. There was no glossy video for the new standard range Model 3 or any sort of sexy unveiling (though with cloth interiors maybe that’s impossible.) The product announcement was at 2pm Pacific Time and not Tesla’s normal 8pm Pacific time slot for product unveilings. The press call was limited to a small group of journalists and wasn’t even webcast even though Musk disclosed material non-public information (take that Reg FD!). There are currently no pictures of the standard range Model 3 on the company’s website. There are no standard range Model 3s available for the public to test drive; but wait TSLA announced that there will be no test drives for its cars going forward! There are no reviews of the standard range Model 3; hell it’s not even clear if they have ever even produced a prototype! TSLA announced the cheaper Model 3 version before most of the reservation holders had received their much more expensive Model 3s in Europe. (I wonder how many people decide to cancel their orders and then reorder the significantly cheaper version?)

TSLA has not made any sort of battery chemistry improvement that magically lowers the COGs of the Model 3 below $30k. TSLA has made no attempt to describe the virtues of this entry level product, and didn’t even mention in its press release that in a state like CA, NY, MA, or CO the car would likely cost under $30k net of tax rebates (that would strike me as the most obvious thing someone would include in a such a product announcement if it was planned.) Instead, the blog post announcing the product release spends more ink explaining away TSLA’s second round of mass layoffs in 2 months and decision to close most of its “stores.” It’s almost as if today’s “announcement” was really just an attempt to put positive spin on this “growth” company being forced to fire thousands of workers once again.

We believe today's announcement was a last second desperation Hail Mary to prop up the stock and bring in much needed cash since Musk never planned on having to pay the convert off in cash. Given Musk’s flagrant disregard for the SEC, it seems highly unlikely at this point that TSLA will be able to get a registration statement approved for a registered offering of debt or equity securities so long as Musk is CEO. Unable to raise new cash from the capital markets, Musk is desperately searching for some source of liquidity.

Tesla’s balance sheet is increasingly stressed. With the $920 million convertible bond payment due tomorrow as well as Q1 cash burn of likely over $1 billion (Musk said that Q1 will have negative earnings, the company guided to a 10k unit increase in in transit inventory at the end of Q1 which should imply an around $400 million increase in inventory and the company guided to $2.5 billion in capex for 2019 or ~$625 million a q) TSLA will likely see an over $2 billion drop in its cash balance. Tesla ended Q4 with ~$3.7 billion in cash on its balance sheet. Rough math would imply that TSLA likely will end Q1 with on balance sheet cash between $1.3 to $1.8 billion. In addition, TSLA has massive purchase obligations totaling over $4.8 billion in 2019 most of which relate to battery volume commitments with Panasonic from the Gigafactory. Since TSLA’s ramp of the Model 3 has been going slower than it and Panasonic’s original expectations, TSLA doesn’t really have the demand at present order rates for all the batteries it is obligated to purchase this year. TSLA needs something to catalyze vehicle increased demand in order to have somewhere to put all these batteries (better to make a car at little to no gross margin than have to store all these batteries which have a high propensity to explode -- maybe that’s why there have been 5 fires at the Fremont factory in the last 2 years?).

We believe the principal reason for the standard range Model 3 announcement today was a desperate attempt to get cash. The TSLA website says that if you order a standard range Model 3 today you will receive it in 2-4 weeks; fwiw we highly doubt this is true and would guess customers won’t get the car until Q3 at the earliest. Since TSLA only produces ~5,000 Model 3/week, for this disclosure to be true it would imply that TSLA has less than 20,000 reservations in backlog for the “$35k” model 3 (no wonder Deepak didn’t want to reveal the reservation number on the Q4 call.) Anyone who decides to purchase the standard range Model 3 today will have to put down $2,500 today and then the rest of the purchase price when the vehicle delivers. I assume Musk believes that he might be able to get 50k to 100k orders for the standard range Model 3 which might get him $125 to $250 million in cash in what is in effect an interest free loan for the likely 6 months it would take TSLA in all likelihood to actually deliver these cars.

In addition, Musk needed a distraction from horrible news of the past 2 weeks. On Sunday there was a Model S crash in Davie, FL. The driver side front wheel’s suspension failed causing the wheel to fall off and the car to veer left and then spin around and crash into trees in the highway median. The driver survived the initial crash but then burned to death in broad daylight b/c first responders and bystanders could not open the door to his model S or break its rear window before the car exploded -- this was the second such case of people initially surviving a Model S crash before being burned to death inside a crashed Model S in Broward county in under a year. In both cases, first responders and bystanders were unable to get the crash victims out of the car before it exploded as the door handles were retracted into the car and couldn’t therefore be opened. On Monday, TSLA/Musk got another piece of horrible news. The SEC filed a petition with the District court seeking a contempt charge against Musk for his clear violation of this settlement agreement with the agency.

These news stories came on top of last week’s news that Tesla’s General Counsel Dane Butswinkas (who had been hired in December and likely started in January) had left the company sometime in February. With today’s announcement that Musk had fired Butswinkas and his firm Williams Connoley as his personal counsel in the SEC case, it is increasingly clear that Butswinkas’s departure as general counsel in less than a month was not amicable. I wonder what spooked him so much to quit what he had previously described as a “unique and interesting opportunity” in such a short time (https://allthenewsworthknowing.com/index.php/2018/12/13/tesla-hires-williams-connolly-chairman-and-trial-lawyer-dane-butswinkas-as-general-counsel)

In addition, Consumer Reports had removed its recommended rating for the Model 3 last week.

Musk needed to change the news cycle and a good old fashioned half-assed product reveal was probably the best idea he could come up with.

Meanwhile, Musk appears to be very tight on personal liquidity at the moment. According to Bloomberg, at some point in 2018, Musk asked Morgan Stanley if he could borrow against his Spacex shares (they refused.) In December, after Spacex’s attempt to raise $750 million in new equity had failed, Musk was forced to find the money to prop up Spacex’s stretched balance sheet. The WSJ’s revelation that Musk had embezzled almost $100 million from Spacex to pay for the Boring Company’s demonstration tunnel had turned off other possible sources of capital. Desperate to find money fast, Musk mortgaged five of his California homes to for over $61 million in the middle of December (https://www.bloomberg.com/news/articles/2019-02-22/elon-musk-turns-to-morgan-stanley-for-five-monster-mortgages)

In January, Musk did a ~$50 million sale/leaseback transaction on his prized corporate jet. (I highly recommend reading this analysis of Musk’s actions in December as it puts the pieces together very well (https://www.sutori.com/story/collateral-secured-elon-musk-hawks-houses-after-boring-tears-spacex-new-hole--LTF6cSmx9WZvVn8mCtQ2MsPb)

Mortgaging homes and selling air planes on a moment’s notice are not the actions of someone who has his financial house in order.

Musk’s massive (>$1 billion) margin loan on his TSLA stock has been used to finance his personal empire (houses, planes, SpaceX, Boring company, et cetera) Musk likely has tapped out his ability to borrow further against his TSLA shares since presumably he would have margined more shares before mortgaging his house (we will know more when the proxy comes out.) Therefore, Musk can not afford for the TSLA share price to crash. We believe Musk’s margin loan would force him to be margin called if the share price falls to around $210/share. Worried that the share price would crash in the face of the barrage of negative news over the last two weeks, Musk got desperate and “teased” today’s announcement on Tuesday and then made the announcement today as an attempt to keep the stock away from his danger zone which starts around $250/share.

Musk appears to be on the brink of a massive collapse of his empire that will ruin him financially. We believe Musk will do or say anything to prevent the inevitable from happening. Covering up mass layoffs with the half assed launch of a product that likely won’t be delivered for 6 months while confiscating consumers hard earned money for 6 months before coming close to delivering them a car seems par for the course for Elon. Using such a “product announcement story” to drive negative news stories out of the news cycle is definitely pure Elon.

6) The Panasonic executive who signed the gigafactory agreement with TSLA resigned (was fired?) yesterday. I wonder why the guy who spent billions of dollars building a gigantic factory in the middle of no where in exchange for purchase commitments from TSLA that have had to be renegotiated several times already would decide to retire now?

https://news.panasonic.com/global/press/data/2019/02/en190228-7/en190228-7-1.pdf

https://www.sec.gov/Archives/edgar/data/1318605/000119312516735804/d253219dex102.htm

Also the price of the Model S P100D (TSLA's highest end model) had its price dropped by 60,000 euros in France yesterday. It's almost as if they are doing an everything must go inventory liquidation sale right at the same time as the convert maturity. Hmmm. I wonder why? Also, I wonder if the Model 3 is cannibalizing sales of the higher end models? Hmmm........

Prices in Norway were also cut substantially as well as most other European markets

Not to be outdone, the price of every model has been cut in China with a 34% price cut for the highest end Model S.

Margins are going to be atrocious. This is an inventory liquidation fire sale in order to shore up the balance sheet.

7) Inside Evs (who are notoriously optomistic in their estimates) is out with its February estimate for electric vehicle sales: https://insideevs.com/monthly-plug-in-sales-scorecard

Data out of Europe suggests that Model 3 sales in Europe are around 2,000 units YTD.

If you assume that China is roughly similar to Europe, that would imply ~2k units in China or ~14k total Model 3 Sales YTD. If TSLA has been producing Model 3s at a 4,000/week rate, this would imply that inventory has built by ~22,000 units or almost $800 million quarter to date. No wonder the company is desperate to move products now. Also this may imply that TSLA has under $1 billion in on balance sheet cash once the convert is paid off.

Tesla guided to Q1 Model 3 deliveries being 10k less than production which would be up QoQ from Q4's 61,394 units. This would seem to imply Q1 Model 3 deliveries of around 55k units.

It appears TSLA will be lucky to have 40k Model 3 deliveries in Q1.

8) I'm not sure what Musk can do at this point. If Musk leaves, the stock craters below his margin call level and he's personally wiped out.

If TSLA isn't able to press release or leak to a friendly media outlet that demand for the SR has been "off the hook" or some other bullshit by Monday then its game over. Even the thickheaded longs in this stock should be able to realized that if there isn't a surge in orders after the SR launch then there is no latent demand for this product. I think the selling in the stock could waterfall as soon as next week as it becomes increasingly evident that demand from first adopters has been satiated and Tesla's products (which have never really been updated since their respective launches) are tired and remain niche.

In the past, shareholders could always justify owning the stock saying the big demand inflection from the Model 3 SR was on the come. Now its here. I highly doubt there is some massive uptick in orders for this new product (people who buy ~$35k cars don't have idle liquidity sitting around to buy such a car in all cash and given what Musk just did to residual values of the existing S/3/X cars, what lender is stupid enough to lend against the low end Model 3 at this point?)

I think there is very little chance Musk remains CEO by the end of March. The SEC loses all credibility the longer it allows him to openly flaunt his agreement with them. Its possible that he intentionally poked the bear, but I think its more likely he's just extremely reckless in his personal behavior and has no self control.

If I was Musk, I would pull a Mike Pearson and go into rehab.

9) 18m shares traded so far today. 10m shares traded each of the last 2 days pushing the stock up almost 10% on hopes that Musk would tweet something positive.

I asked this 2 weeks ago and I'll ask again b/c I cannot figure out why anyone is buying and why this still is a $60b EV.

What is the bull thesis here?

At least other overvalued momentum names can claim that there's an unlimited potential TAM or that they'll be the next AMZN or they'll hit scale in 10 years or whatever. What is the remaining TSLA bull thesis here? It is now a busted growth stock and throughout history, when a high-flying growth stock comps negative revenue, the shares get obliterated almost instantly. Why has this one been different and what makes someone want to buy it. As I see it they are;

  • Out of cash
  • CEO about to get booted
  • No demand despite lowering the price point 3 times this quarter
  • Multiple billions in lawsuits
  • Customers increasingly upset with build and service quality
  • New and better products coming

What is the guy buying at $294 thinking to himself to justify committing capital here? Is it just buying in anger to hurt the shorts? I really cannot think of a bull thesis here beyond 'don't worry, Elon will figure it out' except Elon seems increasingly out of touch with the realities of the business.

10) Question: Assuming this isn't an excuse to fail, why is everyone so focused on whether Elon remains CEO? Just like when he lost the Chairman position, won't he just tweet that he has no title at TSLA (I think the words were "I am now the nothing of Tesla" or something similar), but make it clear he is still calling the shots? Additionally, if Elon being CEO is preventing access to capital markets, won't losing the position allow a raise?

Answer: Because 1) TSLA's retail flock will be hard to keep without Musk fully in charge (without Musk what is Tesla other than a shitty car company?), and more importantly 2) any new CEO is going to reveal all the skeletons in Tesla's closet. There are a lot of reasons to believe TSLA has been engaging in very aggressive (if not outright fraudulent) accounting (just look at how they account for the gigafactory hiding the capex for it through financing leases in the cash flow from financing portion of the cash flow statement or how TSLA capitalized its unsellable car inventory onto its balance sheet instead of writing them off on the income statement.) Many of TSLA's vaporware products like FSD and solar roof are way behind schedule to the extent they exist at all. Elon took real money selling these products that still doesn't exist years after they started being "sold." Elon needed the cash so an extra ~$5,000 from suckers in pure cash gross profit for FSD was worth perpetuating a lie. A new CEO would want to come clean on all of the frauds within the first few weeks of coming on board. The stock is likely to plunge as the depth of the fraud is revealed.

If TSLA does a capital raise, the question is what are the terms. At this point, TSLA would likely have to preannounce with specifics if it wants to do an equity offering. Q1 is a bloodbath at this point (with the new charges for store closures and mass firings losses are likely well over $1 billion and revenues are likely to be down 25%+ QoQ from Q4.) I highly doubt if TSLA announced an equity offering on Monday, they could price it above $200/share. So long as Elon and his cronies are on board they are not going to allow an equity offering which would result in them losing control of the float and therefore materially increase the risk of musk being margin called to occur.

11) Tesla Slashes Retail Employee Compensation, Seemingly Pushing Them Out Instead Of Layoffs

Tesla is cutting employee bonuses – resulting in a significant decrease in overall compensation for many retail employees.

Some Tesla employees are suspicious of the move ahead of seemingly imminent layoffs.

Earlier this week, Tesla launched the long-promised $35,000 version of the Model 3.

CEO Elon Musk said that they plan to make that price viable by moving all sales online only, closing stores, and reducing retail headcount.

But while the company has yet to lay off employees, Electrek has now learned from Tesla employees that the automaker has stopped all bonuses for retail staff.

According to some Tesla employees talking to Electrek, those bonuses represented the majority of the overall compensation of many retail workers.

It enabled some of the top owner advisors to make a salary in the six-figure range.

Now that Tesla is transitioning to online sales, the company is removing all commission for retail employees even though they are seemingly still going to handle sales throughout the transition period.

Some employees have told Electrek that they believe Tesla is slashing their compensation in an attempt to push them out during the transition before layoffs to avoid having to pay severance.

We asked Tesla about the situation, but the company declined to comment.

Read the full article here by Electrek

12) NHTSA announced today that it is investigating TSLA for Sunday's whompy wheel Model S Davie, FL crash where the wheel fell off during normal driving causing the car to spin out of control and crash into a tree and the driver burned alive because first responders couldn't open the car doors before the car exploded and Friday's autopiloted Model 3 driving straight into a semi and decapitating the driver crash in Delray Beach, FL.

A spokesman for the U.S. Transportation Department that oversees NHTSA said late on Friday that "NHTSA’s Crash Investigation Division assigned a Special Crash Investigation team to investigate the crash," while the NTSB said it is sending a team of three "to conduct a safety investigation."

The Delray Beach crash is very similar to a 2016 autopilot crash that also decapitated its driver when the car tried to drive under a semi and also occurred in Florida.

In May 2016, a Tesla Model S driver was killed near Williston, Fla., using Autopilot when he slammed into a tractor trailer that also sheared off the vehicle roof. The incident raised questions about the safety of systems that can perform driving tasks for extended stretches of time with little or no human intervention, but which cannot completely replace human drivers. The NTSB said in September 2017 Tesla lacked proper safeguards that allowed the driver “to use the system outside of the environment for which it was designed and the system gave far too much leeway to the driver to divert his attention."