Stanphyl Capital letter for the month of Febuary 2019 discussing their short position in Tesla stock and the U.S. tax credit advantage that will be gone by the end of 2019.
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.
2) Tesla will again soon be losing a lot of money with a terrible balance sheet despite relatively light competition, yet is about to be confronted with massive competition in every aspect of its business.
3) Elon Musk is extremely untrustworthy.
Tonight (February 28th) Tesla announced multiple desperate price cuts as its backlog is nearly gone and new orders severely lag. It finally introduced a $35,000 version of the Model 3, and despite the fact that it has just 220 miles of range and comes only in black with a cheap cloth interior you’d be embarrassed to find on a ‘63 Dodge Dart, I estimate the company will lose at least $3000 (before options) on each one it sells; in the best possible scenario, perhaps buyers will option them up to the break-even point. It also introduced a 240-mile version with a nicer interior for $37,000; that one may “only” lose around $1500 but is less likely to be “optioned up” as it comes in a choice of five colors and has power seats and a nicer interior. (All Model 3s, however, have just a single touchscreen on their dashboards.)
Tesla also cut prices (for the third time this year!) on other versions of the Model 3 by around $3000, after having slashed them by $2000 in January and another $1100 earlier in February. Additionally, it slashed prices on the Model S by $6000 after cutting them on the long-range S and X by a whopping $11,000 earlier this month to create a mid-range model with very slightly reduced range via a software restriction (thereby enjoying no cost savings on the batteries). And finally, the company is closing nearly all its retail stores and switching to on-line only buying.
Tesla felt forced to do all this due to terrible U.S. demand and weakness in Europe and China (where it was already cutting prices). In January the company reported a 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 that I estimate on a GAAP basis will be well over $1 billion for 2019. But that’s not all, folks, because…
In late February the SEC finally lost patience with Elon Musk’s continual violation of last year’s settlement stemming from his fraudulent “$420 buyout” tweet and asked the presiding judge to hold him in contempt. Musk (of course) swiftly responded by further mocking the SEC. This may well result in his removal as an officer of Tesla, which would likely create a near-instant implosion of this bubble-stock, as without its grifting leader this “religion” becomes nothing more than an insolvent car company with a busted growth story.
Of course, Musk’s public persona of impetuous stupidity undoubtedly provides an illuminating window into his private persona. Tesla has the most executive departures I’ve ever seen from any company (here’s the astounding full list), a dubious achievement that continued in February as its new general counsel quit after fewer than two months on the job (a move perhaps related to Musk’s aforementioned settlement violations). This followed the January departure of its CFO, which itself followed the departures of a massive number of financial, manufacturing and engineering execs in 2018 and 2017. These people aren’t leaving because things are going great (or even passably) at Tesla; rather, they’re likely leaving because Musk is either an outright crook or the world’s biggest jerk to work for (or both). Could the business (if not the stock price) be saved in its present form if he left? Nope, it’s too late. Even if Musk steps down in favor of someone who knows what he’s doing, emerging competitive factors (outlined in great detail below) and Tesla’s balance sheet make the company too late to “fix” without major financial and operational restructuring.
How poorly is Tesla run? The quality of its products is one indication, and in February Consumer Reports published its annual auto reliability survey and guess who finished second-to-last? As one wag said on Twitter: you can now officially call Tesla “the Cadillac of electric cars”:
Consumer Reports’ awful Tesla reliability data jibes with the latest survey from True Delta, which ranks Tesla last among all available vehicles, while in September British magazine What Car? Ranked Tesla reliability so low that it’s in “a league” of its own.
But what about all those Tesla owners who tell you how much they love their cars despite the service and reliability problems?
I’ve always argued that Tesla owners (and TSLA bulls) confuse “luxury electric car love” for “Tesla love,” and now that superior European alternatives are beginning to roll out, Tesla drivers will flock to them. For instance, 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 only slightly more than 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. So Model S sales are about to be *so* dead. And if that’s not enough, a crossover version of the Taycan will follow soon thereafter, as will an all-electric version of the next Maycan. So Model X sales are *also* about to be *so* dead, especially in light of the other electric crossovers and SUVs discussed below…
Porsche’s offerings are just part of an onslaught of luxury EV competition that’s about to rip the face off sales of Tesla’s most profitable models, the S&X. This spring 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. (Although the Audi’s range is expected to come in at around 225 miles vs. 270 miles for the Model X, the Audi will charge faster.) The e-tron received solid reviews (here, here, here and here), and three more electric Audis will follow it: 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 widely available in Europe in the summer of 2019 and in the U.S. in early 2020, with an EPA range of around 225 miles and a price that will be around $20,000 (!) less than the Model X before the Mercedes’ (by then) $7500 U.S. tax credit advantage. And by 2022 Mercedes will have ten fully electric models, covering nearly all its model lines.
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 negative impact on sales of Tesla’s Model 3 and a future 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).
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 matches GM’s despite selling approximately 300,000 cars a year while Ford and GM make billions of dollars selling 6 million and 8.4 million vehicles respectively. Thus this cash-burning Musk vanity project is worth vastly less than its roughly $65 billion enterprise value and—thanks to nearly $34 billion in debt, purchase and lease obligations—may eventually be worth "zero."