Two More Warning Flags In Tesla Inc (TSLA)’s 10-Q

Whitney Tilson’s email to investors discussing his invitation to his two parties at the Berkshire meeting; Why I keep coming to the meeting; Two more warning flags in Tesla Inc (NASDAQ:TSLA)’s 10-Q; Debate over Tesla’s Autonomy Day; Subscriber feedback; Endurance races.

financial debt covenants

1) This Saturday, I will be attending my 22nd consecutive Berkshire Hathaway annual meeting. If you’re going to Omaha this weekend (which I highly recommend!), I’d like to invite you to two parties I’m hosting on Friday evening and Saturday afternoon.

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Q1 hedge fund letters, conference, scoops etc

They are free, open to all (more than 400 people have RSVPed), and will take place in the St. Nicholas Room (second floor) at the Hilton Omaha, right across the street from the CenturyLink Center where the meeting is held:

1) My annual cocktail party from 8 p.m. to midnight on Friday, May 3. No agenda, no speeches, no dress code – just come, enjoy the drinks and snacks, and meet other value investors.

2) A casual get-together immediately following the annual meeting (about 3 p.m.) on Saturday, May 4. It will end at 6 p.m.

To RSVP for either or both of these events, please click here.

I hope to see you there!

P.S. It's not too late to make plans to come to the meeting. While you're supposed to be a shareholder to attend, everyone has plenty of extra tickets – or you can buy one B share (BRK.B) and bring a printed statement. Flights in and out of Omaha that weekend are either full or expensive, but you can fly to Kansas City and drive three hours from there. I also found plenty of hotel options on Booking.com and Hotwire, including two under $100/night on the latter.

2) I'm often asked why I keep going to these meetings. In short, I have a lot of fun, catching up with old friends and making new ones. Plus, even after more than two decades of studying Buffett and Munger intensively, I find that I still keep learning from them.

In the early days of my career, I was so inexperienced – and they were such brilliant, inspiring, and patient teachers! Had I not absorbed all of the investing lessons they imparted, I never would have achieved anything close to the success I did.

I've come to realize, though, that the most important things I've learned (and continue to learn) from these wise men go beyond investing into what Munger calls "worldly wisdom," which is the key to succeeding in the larger game of life.

At its core, this wisdom is rooted in some simple concepts: become a lifelong learner, develop good habits, be nice to everyone, marry the right person and then keep that relationship strong, and avoid calamities. But, like investing, while these concepts are simple in concept, they can be difficult in practice. So it's always good to hear Buffett and Munger's wisdom every year.

3) Tesla is now down about 20% from when I made my big call in my March 4 e-mail:

I've been following [Tesla] closely for years and, after carefully reviewing everything over the weekend, 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.

In only eight weeks, the stock is already 30% of the way to my price target. I'm now even more convinced that the stock will reach that level by year-end.

The company just released its first-quarter 10-Q report. I haven't had a chance to digest it fully yet, but two things caught my eye:

a) On page 12, the company disclosed revenue of $216 million from "Automotive regulatory credits" (also known as Zero Emission Vehicle Credits), up from only $1 million in the previous quarter. Tesla didn't disclose this information in its first quarter earnings release or conference call last Wednesday – and it should have. It's highly material because, without it, Tesla's losses for the quarter, instead of $702 million, would have exceeded $900 million! Here's a Financial Times article from last August with more on this topic: Tesla: a strange case of credits. Excerpt:

ZEV credits are state incentives designed to push automakers to create electric cars. In California, and other states, automakers have to earn them to partially offset sales of internal combustion engine cars. Tesla, having generated a surplus of credits over the years, frequently sells them to other manufacturers who need to hit their quotas.

Such sales are essentially pure (gross) profit, leading to a focus on their impact as the company attempts to become consistently profitable.

b) On the top of page 22, Tesla disclosed that: "As of March 31, 2019, we were in material compliance with all financial debt covenants..."

This is slightly different from the same line in Q3 2018 10-Q, which reads: "As of September 30, 2018, we were in compliance with all financial debt covenants..."

"In material compliance" isn't the same as "in compliance." Trust me, every word in Tesla's SEC filings is carefully reviewed by top lawyers. The introduction of the word "material" means that Tesla is out of compliance with at least one of its financial debt covenants.

Add two more huge warning flags to the long list of them at Tesla...

4) I'm moderating incredibly insightful discussions among my friends on my Tesla e-mail list (which you can join by sending a blank e-mail to tsla-subscribe@mailer.kasecapital.com). On Friday, one of my friends wrote:

The Tesla Autonomy Day was extremely impressive. Whether you're long or short the stock, it's worth watching. I think the team (@karpathy in particular) makes a very compelling case for why LIDAR is a dumb approach: youtu.be/Ucp0TTmvqOE.

I watched Tesla's entire Autonomy Day and it did indeed appear impressive, with a ton of technical jargon and big claims, delivered with absolute certainty.

But I suspect it's mostly BS for three reasons:

a) Musk has proven himself to be a pathological liar;

b) Tesla is in bad shape and Musk knew last Monday when he made this presentation that the company was about to report horrific earnings, so he was especially desperate; and

c) The ideas that Tesla has developed by far the best chip in the world, has concluded that Light Detection and Ranging ("LIDAR") isn't necessary, etc. strains credulity. It's not like the engineers working on this at Waymo, Uber, etc. are idiots...

A friend of mine has some wise thoughts on this... and the mistake many people are making when evaluating Tesla (note the website he links to, https://evsalestracker.com/#/Tesla, which shows that Tesla's second-quarter sales are trending toward 56,861 cars, which would be a catastrophic miss versus guidance of 90,000-100,000):

I agree 100% that "it's worth watching" Tesla's autonomy/robotaxi presentation from last Monday. Indeed, it is essential for any investor, long or short, just like he writes.

But you know what else is equally 100% "worth watching"? To attend or otherwise watch the equivalent presentations by all the other automakers and their Tier-1 suppliers, on this and other comparative subjects.

I have found a pattern in the Tesla debate, and that is that those who attend or listen only to Tesla-hosted events on this-or-that subject – not only autonomy/robotaxi, but manufacturing techniques, paint shop tech, infotainment systems, driver ergonomics, interior composition, off-road capabilities, thermal management, crash testing, suspension design, powertrain economics, logistics supply chain management, towing capability and stability – and literally dozens of other subjects, get a one-sided view.

The analogy would be, for example, someone who only attended AMD presentations, but never met with Nvidia's or Intel's people for their presentations and argument. Or someone from the remotest rural tribe in the most primitive lands on Earth arriving in America for the first time, and after having visited a Burger King for the first time, declares himself an expert on hamburgers, confidently declaring that Burger King makes the best burger in America. Never tried Five Guys, Shake Shack, Habit Burger, Smashburger...

For example, I almost never see any discussion among those who appear to base their Tesla autonomy optimism on meeting with Tesla only, about the fact that the Cadillac CT6 remains the only car in the U.S. market where the driver is allowed to take the hands off the wheel. This car has been in the market for 18 months already with this functionality.

One might therefore say that Cadillac is at least 18 months ahead of Tesla in the area of autonomous technology – an advantage Tesla itself said will take at least another 18 months until it expects to be allowed to get to that point. So, by Tesla's own implied admission, Cadillac (GM) is 3 years ahead of Tesla in this field. And that doesn't even account for what GM will have in 18 months from now, that it hasn't told us about yet. So, GM's autonomous advantage over Tesla could be more than just 36 months. We'll see.

I noticed that your friend had also expressed admiration on his Twitter feed for Tesla's argument that LIDAR was not necessary for a higher degree of autonomy, such as Level 3, 4 or 5. Tesla makes the argument that a human being effectively has a camera only (eyes) and therefore a car shouldn't need a LIDAR either.

I don't think Tesla's argument is an impossible one, certainly not in the long run, but it's making things a lot harder in the short run. Tesla itself admits that the car needs to have one or more radars. Well, a human being doesn't have a radar built into its skull either, does it? Same with LIDAR. The reality right now is that the problem of automotive autonomy is so hard, and the downside if you crash the car – especially at speed – is so high, that you realistically have to use every technological tool in the arsenal if you are going to maximize the chance of a reliable autonomous product and performance. If you are not taking advantage of LIDAR, the automaker (Tesla in this case) would be opening itself up to the severest form of litigation and recall risk, if a Tesla should ever get involved in an accident when the driver had his hands off the wheel and eyes off the road.

The reality is that even WITH a LIDAR, getting to Level 3, 4 or 5 is already nearly impossible for many years to come. Unique among technologies as far as I know, automakers are LESS optimistic now in getting to those higher levels of autonomy – 3, 4 and 5 – than they were even 2, 3, 4 or 5 years ago. You would know this if you talked to all the automakers – not only Tesla.

Everyone in the industry is amazed at the new and improved technologies – sensor and computer hardware – and they all are improving their software, but the problem itself seems to be further away in the distance. The realization of what it will take to fully validate a socially acceptable product is sinking in, and it's not looking pretty in terms of a timeline. I avoid talking in absolutes, such as "always" and "never" but this problem is simply looking further away for a "solution" than it did, to almost all industry participants, 2-3-4-5 years ago. It's almost reminding me of The League of Nations and The United Nations as "solutions" to achieving world peace: Very elusive at best.

While I have you on the line, I recommend keeping an eye on this Tesla unit sales tracker: https://evsalestracker.com/#/Tesla. It follows only Tesla and Jaguar (Jaguar's electric car is outselling Tesla Model S and X in Europe now, as is the Audi eTron).

This tracker has proven remarkably accurate thus far. It overestimated Tesla's sales in Q1, but by a smaller margin than most (very few people came close to the actual 63,000 number). For Q2, it is now estimating a beyond-catastrophic 56,861 units sold. Considering Tesla provided Q2 guidance of 90,000 to 100,000 just this week, if this tracker overestimated last quarter, and is merely "right" this time... . Well, I think you can figure out how catastrophic that would be for Tesla on a multitude of levels.

Most specifically, let's assume Tesla is now going to race out and try to do a follow-on stock offering no later than May. If it does that, while maintaining a 90,000 to 100,000 unit guidance for Q2 – and the actual result comes in lower than 90,000, let alone anywhere near the ballpark of this 56,861 estimate, that would be problematic, wouldn't it? I assume it would be an embarrassment for the underwriters too. Would Tesla and its underwriters be sued into oblivion?

Then again, Tesla and Musk have tended to work more under the philosophy of asking for forgiveness after the fact, than permission in advance.

For all that is fair, just and prudent, underwriters should wait to consider backing a Tesla stock offering until after Tesla reports Q2 results. Anything before then would be like trying to cross a trench warfare minefield on the Eastern Front in 1917: Expect lots of damage, including to your reputation as an underwriter.

5) One of my first subscribers, Patrick M., sent me this note over the weekend:

I wanted you to know that your article on The Worst Company in America gave me the impetus to invest $5,000 in Tesla puts and in two days I made $3,000. I also invested $10,000 in each of the five new portfolio recommendations (a little extra in [one stock] – $20,000 – and [another stock] – $15,000) and on paper I'm up another $2,500 in less than a week.

Thanks to you, my Lifetime Membership is paid for and I'm looking forward to our relationship. Keep up the good work.

Thanks, Patrick! You can join him and subscribe and get all my first monthly issue, special reports, and Friday's update on Tesla here. (For an extremely limited time, you can watch a replay of the webinar I recorded earlier this month right here.)

We're so sure that you'll agree that you're getting far more value than what you're paying that we're offering a 30-day money-back guarantee.

6) I just did a Spartan Beast race on Saturday (picture below) and felt pretty good after doing 14 miles, 30 obstacles, and 4,900 feet of vertical going up and down the Mountain Creek ski area in New Jersey.

Spartan Beast

But this woman puts me to shame. What a story of resilience and courage! An Amputee's Toughest Challenge Yet: Her 140-Mile Run in the Desert. Excerpt:

Before this desert race, she had established a dozen or so world records or firsts for below-the-knee amputees, including running the 26.2 miles of the 2006 Chicago Marathon in 3 hours 4 minutes 16 seconds. In 2009, she was named the winner of the A.A.U. James E. Sullivan Award as the nation's top amateur athlete. In 2011, she became the first female amputee to finish the Badwater Ultramarathon, a brutal 135-mile race in July from Death Valley to the Mount Whitney trailhead at 8,300 feet.

Last summer, Palmiero-Winters was one of only 12 finishers at the hellish Spartan Death Race in Pittsfield, Vt., a 72-hour slog that included running, hiking and extreme tasks like 3,000 burpees, a 12-hour crawl under barbed wire and a seven-hour rope climb.

"Amy is the toughest person I know," said Joe De Sena, the founder of the Death Race.

Now she faced perhaps her harshest test, this marathon of the sand, taking tens of thousands of jarring strides on her prosthetic leg, her natural leg having borne years of asymmetrical pounding, the calf with reduced function, the foot with broken metal screws, the second toe fused straight.

Best regards,

Whitney

 




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, 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