Whitney Tilson’s email to investors discussing how Tesla could blow sky high and there are many other investors who are far more obsessed with Tesla.
I’ve been writing a lot about Tesla because it’s both highly entertaining and highly educational. It rivals Valeant as the single best case study I’ve ever encountered, as it covers so many aspects of business and investing: technology/innovation, finance, accounting, management, marketing, regulation, etc.
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1) “How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
- The Sun Also Rises, Ernest Hemingway
Folks, my "spidey sense" is tingling. I don’t think it’s yet likely (i.e., greater than 50%), but the odds that Tesla blows sky-high – perhaps soon – are rising rapidly. It could have one of those days in which the stock falls 30%-60% like Stamps.com (STMP) last month or Valeant – now Bausch Health Companies (BHC) – in late 2015.
If this happens, it would likely be due to the SEC forcing Musk out – he’s certainly doing everything he can to poke the bear – combined with an announcement by the company or the SEC that it’s investigating possible fraud.
2) Lest you think I’m singularly obsessed with Tesla, I actually consider myself a moderate. There are many others who are far more obsessed – like Harris Kupperman (aka Kuppy), who regularly writes about Tesla on his blog, Adventures in Capitalism (in last Thursday’s email, I linked to two of his recent posts: End Of The Road… and Can’t Spell Felon Without ELON).
In his latest post, Ask Kuppy, he answers many of his readers’ questions, including how he’s using put spreads to manifest his bearish view on the stock. I particularly enjoyed his response to this question:
Why do you think so many smart people (ie. Chanos, Einhorn, You) are so obsessed with Tesla? There’s thousands on message boards talking about this as a fraud and those people clearly put most of their waking time into following this including staking out delivery centers for days at a time. Seems like a giant waste of time to me. I get the thesis, but why fixate so much? Plenty of scams out there. Why is this so special?
In my whole career, I have never seen anything as fundamentally insane. You have an auto OEM which is a terrible business, hitting a demand wall at a time when competing products that are better are hitting the market. Meanwhile, the company is broke, the CEO is a compulsive liar who can’t stay sober and the numbers are likely fake. Finally, every govt regulator is about to pounce (SEC/DOJ/FBI/DEA) and they cannot raise money from the capital markets.
All of this is about to hit the fan and when it does, there’s a VERY deep and liquid options market to express that trade. While I’m not recommending anyone do this, there are highly liquid monthly and even weekly puts that are deep OTM. If you can guess when it all detonates, there’s actually the potential to make hundreds of times your money on a 7 or 8-figure bet. You don’t often get those sorts of chances in the market (especially where you can play it with huge size) and that’s why everyone is fixated on it. It’s a once in a life-time opportunity for most funds. It’s like buying CDS on housing in 2007.
Finally, you have the fact that the product seems to kill a few people a month and is likely to ramp its pace of murder in a stepped exponential as it is a fundamentally flawed product that deteriorates rapidly with age and corrosion. There’s so many ways to win here and the only question is timing. That’s why we’re all so focused on it, if you get a sense of the exact timing, you can win bigger on Tesla than any other trade globally.
It’s also the best soap opera in finance. Billion times better than Billions…
3) Run, don’t walk, to read this damning Bloomberg article that came out yesterday: When Elon Musk Tried to Destroy a Tesla Whistleblower. I don’t think any Tesla bulls will care – Musk has perfected what you-know-who pioneered: doing so many outrageous things that people become inured to it – but what he for sure did, as documented in this article, is really awful, and I’d bet my last dollar that he made the hoax call that Tripp was planning a mass shooting at the Gigafactory. Excerpt:
Tesla’s PR department spread rumors that Tripp was possibly homicidal and had been part of a grand conspiracy. On Twitter, Musk suggested the Business Insider reporter, Linette Lopez, was on the payroll of short sellers and claimed Tripp had admitted to taking bribes from her in exchange for “valuable Tesla IP.” Lopez denied the allegation.
… Musk’s treatment of Tripp threatens to complicate this legal and regulatory mess. The security manager at the Gigafactory, an ex-military guy with a high-and-tight haircut named Sean Gouthro, has filed a whistleblower report with the SEC. ...........
…Gouthro says that if Tripp was ignored, it was partly because his problems barely rated in Nevada. The Gigafactory, one of the world’s largest buildings by floor area, had been filled with workers so quickly that it was almost impossible to control. ...................
4) I think what’s happening to Tesla is that Musk, the company and the bulls on the stock have vastly overestimated the true demand for the product, which is easy to do in the case of a new, innovative product with a hardcore group of initial customers.
For every product like the iPhone that goes mainstream, dozens of others fizzle out.
I speak from experience because this is what happened to me with Kase Learning.
Initially, demand for my seminars was strong, which led me to believe that there would be significant long-term demand. Consequently, I built out a substantial and costly infrastructure.
But after a handful of well-attended seminars in the first six months, demand slowed significantly despite universally extremely positive reviews from attendees. It was a rude awakening…
I now realize that I got faked out. The initial high demand came mostly from the thousands of you on this email list. You are my most loyal readers and were easy and costless to market to: I simply mentioned an upcoming seminar and a certain percentage of you signed up.
But once I’d met most of the demand from those on my email list, I didn’t have an effective marketing plan to continue to fill my seminars.
What does this have to do with Tesla?
I think Teslas are extremely appealing to a certain demographic: wealthy, environmentally conscious, tech-gadget-lovers who are willing to spend a lot of money to feel great about driving a cool, new, high-performance car. (For more on who buys Teslas, see this article: Tesla Owner Demographics: Income, Age, Gender and More.
It’s a credit to Musk and his team for developing exceptional cars that appealed to these customers. Their demand, combined with the fact that Tesla was the first mover with nearly the entire market to itself, led to incredible growth in recent years – and the forecasts that such growth will continue indefinitely.
But I’m skeptical. The type of customers who are drawn to Teslas are only a tiny sliver of the overall market and there’s little repeat purchasing – a car isn’t like an iPhone, which folks replace every year or two.
I can’t prove this, but I think Tesla has satiated its core niche market and is really struggling to expand beyond this.
In short, Musk got faked out, just like I did. (Isn’t it interesting how this appears to happen especially to people with big egos?)
5) I’ve never seen executive departures like this – captured beautifully by this graphic courtesy of Yahoo Finance:
To this grim chart, add two more senior executive departures in recent days: Tim Newell, Director, Financial Products, who spent “the last 5 years leading #FinTech teams at Tesla and Solar City,” and Adam Laponis, VP of worldwide financial planning and analysis.
Note how heavily skewed the departures are in the legal and accounting areas of the company – exactly what one would expect to see if fraud is occurring.
6) Michael Lewitt of The Credit Strategist with a spot-on take of Musk’s Legal Suicide Mission. Excerpt:
Elon Musk’s response to the SEC’s motion to show cause for why he shouldn’t be held in contempt for violating his consent decree is so insulting to the intelligence of U.S. District Judge Alison J. Nathan that one has to wonder what Tesla’s CEO is thinking.
…Musk’s response to the contempt motion is not a serious legal argument. There is little question he violated his consent decree. Having failed to ask for permission, he is now doubling down in his arrogance and refusing to ask for forgiveness.
…His answer to the SEC’s contempt motion is just further evidence of his utter contempt for the rule of law, his disdain for shareholders, and total disregard for his responsibilities as the CEO of a public company with a $50 billion market cap (which will evaporate as soon as investors come to their senses and realize that his financial statements are as bogus as his tweets and the company’s business is flailing).
I strongly suspect that Judge Nathan is a lot smarter than Musk thinks she is because his recent filing treats her like an idiot.
7) This article asks a good question: was Musk’s decision, quickly reversed, to close Tesla’s retail stores driven by malice or stupidity? And which answer are Tesla bulls hoping for??? Tesla’s online-only sales strategy disguises massive pay cuts. Excerpt:
In my opinion, the bigger question is: was it simply some poor foresight or was it a way to slash retail employee compensation?
Some think that it is just a chaotic – not well thought out – move by Tesla:
While others think that Tesla planned this “online-only” sales transition to drastically cut retail employee compensation:
Normally, I tend to not attribute to malice what can be explained by stupidity, but I have to admit that there are a few things that look strange in this situation.
…Ultimately, this online-only strategy is turning out not to have a real significant impact on the day-to-day job of Tesla’s retail staff. They are still expected to give test drives, drive sales, and try to match buyers with inventory vehicles.
The main difference for them is their compensation has been significantly slashed – 50 to 60% in some cases for Tesla’s top salespeople. That is a big enough drop in compensation to have to make important lifestyle changes and drive them to find new jobs.
8) Anton Wahlman with some great questions. I’d give my right arm to be a fly on the wall if the SEC asked them to Musk under oath! 12 Tesla Questions the SEC Should Ask Musk at the Evidentiary Hearing. Excerpt:
- Elon Musk filed his response to the SEC on March 11. The SEC in turn asked the judge to file a response, which will happen by March 19.
- Judge Nathan approved the SEC’s request, and additionally asked both parties to optionally request an evidentiary hearing for March 26.
- That’s where things get interesting. Of course the SEC would like a hearing, in which it can ask Musk all sorts of questions in front of the judge.
- I have put together twelve questions that the SEC should ask Musk. It would present a huge problem for Musk if he did not answer them truthfully.
- Of course, Musk could object to the questions per se, but that would only open the door for the SEC and DOJ to pursue the questions via subpoena and/or in another forum.