Whitney Tilson’s email to investors discussing Anton Wahlman’s comment on Tesla doing a fleet sale or some other channel-stuffing.
1) Anton Wahlman’s latest article: My Q1 Unit Sales Estimate For Tesla: 60,828, Down 33% From Q4. Summary:
- We are mere days away from March quarter-end, and more automobile unit sales data keeps pouring in, especially from Europe.
- I have revised my Tesla unit sales estimate for Q1, primarily because of changes to a majority of the European countries, plus the U.S.
- There are no material changes to the Model X and S sales estimates, regardless of geography.
- The total quarterly unit estimate now stands at 60,828, which would be down 33% from Tesla’s Q4 2018 unit sales number of 90,966.
- Among the areas where I could still be wrong, would be Tesla doing a fleet sale or some other channel-stuffing “financially delivered” exercise, including to a related party.
Anton added in an email to me:
Take a quick look at this freshly posted February sales chart from China:
That's the top-20 from BEVs and PHEVs combined. Only one car on that list is known in the West -- the Volkswagen Passat GTE.
As for Tesla, it hasn't had a car on China's top-20 plugin list in a very long time. That may change now in March, as a result of the Model 3. In my model, I have assumed 300 units for February and 3,000 for March. For the Model S, 300 per month and for the Model X, 400 per month. Those are guesses, but judging from the numbers posted by the 20th nameplate on that list, they seem reasonable to me.
Maybe the Model 3 turns out to be a barn-burner for Tesla in China, but I don't dare assign any higher numbers on that than I have in my model already -- 300 for February and 3,000 for March.
The Chinese plugin market is "big" -- but it's also totally different than the American and European markets. It's easy for both longs and shorts to be off by quite a bit here. All that said, for March, the U.S. alone is a far bigger swing factor in Tesla's fortunes, than China is. As for Europe, thanks to their fast and diligent reporting, we can bracket the European outcome far tighter and faster than the U.S. and China.
2) For more on Anton’s final bullet about “Tesla doing a fleet sale or some other channel-stuffing “financially delivered” exercise, including to a related party,” check out this thread that helps explains Tesla “immaculate quarter” in Q3 last year. @Badger24 discovered that Tesla sold a bunch of cars to third-party resellers in Europe, which explains the mysterious 103% (!) sequential increase in accounts receivable and the first-ever disclosure that “one entity represented 10% or more of our total accounts receivable balance,” about which Tesla refused to answer questions.
There’s nothing unusual about sales to third-party resellers and, as long as they can’t return the vehicles, Tesla can book the sales and profits upon delivery. But sales to third-party resellers is NOT the same as sales to end users. The former is just a way of transferring inventory to someone else and, as the resellers sell the cars to end users, this will of course impact Tesla’s efforts to sell cars directly to such user going forward. Thus, it’s the kind of highly material information that any investor would want to know about, so the fact that Tesla actively hid what it was doing is deceptive at best and fraud at worst.
3) Speaking of fraud, one of my readers took issue with my email yesterday defending the judge’s decision to throw out the lawsuit against Tesla for its misleading forecasts about its Model 3 production:
I disagree. The lawsuit, especially as amended, had ample evidence of the kind that you describe. Read from ca page 26 onwards in the lawsuit. They had interviewed several (former) employees who testified to the fact that the numbers that Musk promised were physically impossible to achieve -- and that Musk damn well knew it. For example, promising so-and-so many Model 3 units being made during this-or-that month in 2017 when the assembly line equipment wasn't scheduled to be installed by such time.
Those were premeditated lies. When Elon said in July 2017 that the cars were rolling off the assembly line and so-and-so many thousands would be made per week or month imminently (Aug, Sept, etc) -- those were simply false statements. They were all made to support the capital raise in August 2017. Then, as as soon as the money was collected -- it was revealed that Tesla simply wasn't producing the number of cars they had said -- and couldn't have, because the assembly line wasn't even scheduled to be installed until later in the Fall.
The judge was simply bamboozled in this case. He kept drawing some impossible and irrelevant distinction between "production" and "automated production" as if these many thousands of cars could be manufactured in any but one way -- as if it mattered anyway.
Judge Breyer's standard here seems to set an impossible bar for anyone to hold a management accountable for knowingly making false statements by promising things that are physically impossible to achieve -- and arguably even worse.
4) Regarding my earlier email about the VIN gap, a friend writes:
I think that even if it’s true, it’s not necessarily a big deal.
Yes, a VIN gap is illegal, per Federal regulations. VIN numbers must be issued sequentially. That said, maybe it’s something that would generate a fine. The analogy would be Inspector Mueller catching Paul Manafort in having completed a mortgage application incorrectly, some decades ago. That’s fraud too.
But what does it mean, if it’s happening, and why would Tesla be doing it?
In the first instance, a VIN gap by itself doesn’t really change anything on the financial statements. It doesn’t change revenue or cars sold. That’s why I have a hard time to be too worked up about this.
So why is Tesla doing it? It seems to be a “targeted attack” at manipulating one single gullible -- but influential -- individual: Tom Randall at Bloomberg. He runs the Bloomberg Tesla Model 3 tracker: https://www.bloomberg.com/graphics/2018-tesla-tracker/?srnd=hyperdrive
His methodology appears to rely heavily on Tesla’s VIN numbers, so if Tesla skips a few (tens of) thousands here and there, it works like a Hollywood Bel Air drug for the Model 3 tracker formula. There just doesn’t seem to be any other motivation for Tesla to engage in any childish (and illegal) VIN skipping.
However, for those of us investors who realize that Tesla’s problem isn’t production -- but rather demand -- the Bloomberg Model 3 tracker has become essentially irrelevant, even if it weren’t back in the Fall of 2017 and Spring of 2018, when Tesla was simply late to market. Then it was of relevance. But certainly as we exited 2018, it has become a meaningless metric. It’s all about demand now -- production has become, for all practical purposes, irrelevant. That’s the case when you produce more than you can sell.
So if this VIN gap is an entertaining curiosity, and possibly a legal speed bump, should perhaps not be a main focus, what nearby related issue should be a more important focus?
I think that interested parties ought to look to good old-fashioned channel-stuffing, which is closely related to the VIN gap. For example, does Tesla sell to resellers in China and other geographies? Does it engage in questionable end-of-quarter fleet sales?
Will someone ask, perhaps on a financial results call or in a forum in which Tesla is compelled to answer -- and answer truthfully -- these questions about resellers and other forms of channel-stuffing? The answers to those questions may be more relevant and productive than the admittedly entertaining and curious VIN gap circus.
Another friend replied: “The vin gap is not the big issue. It is the gap between manufactured cars and registered car. That is the gap that has certain people agitated.”
To which he replied:
I think what you’re saying is that the gap between registered cars, and those Tesla has claimed are sold, is a problem.
Yes, that would be a problem if we are indeed looking at the right registrations for this-or-that time period. It does seem to me, eyeballing the numbers, that registrations of Tesla cars -- primarily in the U.S. -- simply lag Tesla’s official sales numbers by somewhere in the 1-month to 1-quarter range.
As for Europe, we get great -- daily, in some cases -- registration numbers. China? Well, that’s mostly one big black hole. That’s why said that China may be the best example to find massive channel stuffing. Does Tesla sell something to related parties? Is anyone sitting on (hidden) channel inventories of Tesla cars? I don’t know, but I think this is the reason to dig deep into this.
5) In response to the bull case on Tesla that someone posted on VIC, a friend replies to each point:
These are all very good points. I would respond to the bottom entry in particular, as those are very good questions from the bull perspective:
1) How much of incremental demand would Model 3 leasing open up? Unlike X/Y, Model 3 is currently financed by cash or loan only (any thought why that's the case?) and while financing by loan seems fairly easy (plenty of forum discussions on the topic), leasing would lower monthly payments significantly and would make Model 3 affordable to the wider audience.
-- Absolutely, leasing would greatly help moving the metal. That's one key reason -- but not the only one -- that I think Tesla can meet its 2019 unit sales guidance of 360,000 to 400,000 -- assuming it can stay in business at all.
2) Lower production costs going forward vs Q3'18 and Q4'18. The last two quarters involved significant ramp up and were generally a mess on production sites (tents, incremental workforce and etc.). With production now more streamlined and far less pressure to meet delivery targets, costs per vehicle are likely to be lower. While my thinking is that the reduced sales prices more than offset any positive cost savings effect, market might still look favorably at this development and potentially extrapolate similar cost saving gains into the future.
-- Yes, production costs have likely gone down. But so have prices. What's the net impact of those two movements? I don't know.
3) If Tesla is really out of cash and potentially facing bankruptcy, why it continues with the China expansion? My thinking is that China and other investment plans were put in motion during Q4 when situation looked much better and Tesla has no option to call the reserved capital back. At the same time China factory dream is a Hail Mary that might keep Tesla's wheels turning and investors committed for couple more quarters.
4) Untapped China demand for Model 3. Although shipments so far have been limited, anecdotal evidence from English language media suggests crowds in stores and videos of M3 DMV lines. These are likely results of interest/purchases by Tesla fan base (or even organized PR stunts), but I have no strong arguments on how to handicap the eventual M3 demand in China. NIO sales dipped and China car market is declining overall (although EV sales still up c. 60% YoY), however Tesla fan base might be sufficient to drive M3 sales materially higher in the upcoming quarters.
-- China is hard to gauge. The competition from all sorts of brands and models over there is very different from what is seen in the Americas and Europe. We seem to know how many boats went there, and approximately how many cars were on each boat (little over 1,500 per boat, perhaps). But looking beyond Q1, one has to be a little humble about predicting China, especially in the near term. Unless you're on the ground and speaking with the right people, seeing the right things in the right places, it will be easy to be off by quite a bit for China. Remember the 2014 reseller fiasco, in which Tesla sold cars to resellers and then had to absorb those sales the better part of a year? Yeah, some variant of that could happen again too.
5) How will Tesla bulls view Tesla after badly missed Q1 deliveries? Share price is at the same levels where it was back in Q1 2017 when it was still uncertainty whether Tesla can scale up M3 production. Now Tesla has shown that it can be done (even if margins are questionable). Q1 will be spun as seasonally low, affected by Q4 pull-forward due to subsidy changes, China customs problems and etc. All seemingly temporary issues. Additionally, sales in Europe/China will be presented as steeply sloping upwards. Cash problems will be explained by China factory expansion, M3 sales in new regions, Model Y development and etc. So looking at Q1 alone, there does not seem to be enough meat to cause change in market perception.
-- Well that is indeed the big question, isn't it? If Tesla can't guide to Q2 being better than Q1, then all hope is over. So, a Q2 lift over Q1 is a given for anyone who thinks the company will survive -- let alone the stock go up. But how much? And what will be the volume vs profitability tradeoff? We all know that Tesla can move the metal if it lowers prices -- which hurts margins. I am getting the sense, however -- perhaps falsely -- that the institutional longs are getting tired of a story which is seeing chronic EPS estimate cuts. I know Tesla has survived several consecutive years of such cuts -- going back almost to its inception as a public company -- but at some point patience for such an eternal downtrend must run out. Perhaps now is that time.
It might surprise you to learn that I agree with the judge:
1) Lots of companies make overly optimistic assumptions about the future of their business. In the absence of a smoking gun email or statement along the lines of “I know we’re going to miss our forecasts, but let’s tell investors the opposite”, this shouldn’t be criminalized; and
2) Every Tesla investor knows (or should know) that Musk is prone to puffery – duh!
Tesla, Elon Musk win dismissal of lawsuit over Model 3 production
SAN FRANCISCO (Reuters) - A federal judge in San Francisco dismissed for the second time a securities fraud lawsuit brought by Tesla Inc shareholders alleging that the company made misleading comments about the production status of its Model 3.
Read the full article here by Alexandria Sage, Reuters