Tesla’s Unit Sales; Slight Q2 Miss May Lead To A Strong Rally

Whitney Tilson’s email to investors discussing Kuppy’s latest post called “Giga-Roll”; and his friend comments on his assessment on Tesla‘s unit sales and profit (loss) outlook; What Happens After Amazon’s Domination Is Complete?; The World’s Cheapest Hospital Has to Get Even Cheaper; Is Sunscreen the New Margarine?

Teslas Unit Sales

Free-Photos / Pixabay

I think Kuppy is likely playing this right… Excerpt:

Get Our Activist Investing Case Study!

Get the entire 10-part series on our in-depth study on activist investing in PDF. Save it to your desktop, read it on your tablet, or print it out to read anywhere! Sign up below!

Q1 hedge fund letters, conference, scoops etc

Giga-Roll

Given the amount of time I’ve spent talking about Tesla Inc (NASDAQ:TSLA) on this site, I’d be remiss if I didn’t point out that I materially changed my position over the past few days.

Depending on who you want to believe, Tesla will either meet the low end of Q2 delivery guidance or only fall slightly short of guidance. Normally, when you miss guidance, your shares get obliterated. Given the high short interest and the fanaticism amongst longs who are unlikely to sell no matter what happens, I believe that a slight miss may lead to something between a non-event and a strong rally.

This email appears to have caused some confusion - like whether my view on Tesla has changed. It hasn't. I stand by my year-end $100 price target. I'm not a trader. Kuppy is (at least more so than I am). In forwarding his post, I was merely agreeing with him that the stock could pop in the month between when Tesla reports possibly-less-worse-than-feared deliveries (next week) and likely-dreadful earnings (~August 7).

As always, every investor should do their own work and make their own decisions.


In response to my Tesla update in my mass email yesterday (which currently goes to more than 34,000 people) (see below), a friend wrote:

Your assessment on Tesla’s unit sales and profit (loss) outlook is exactly right here, I think.  The number of cars Tesla will sell is of course mostly dependent on the prices they will charge for them.  Right now they’re selling a dollar for 80 cents.

Ask any automaker how many more cars they would sell if they lowered their “all other things equal” prices (MSRP as well as post-discount) by, say, 20%.  They would all give you a much larger number than their current sales. Selling that car for $40,000 instead of $50,000 makes a world of difference in terms of unit volumed demanded by the consumer.

In a way, Tesla’s unit sales number is a little bit like what Uber and Lyft have been doing: Pricing the product at a loss, and taking market share -- somehow convincing their shareholders that it’s a good idea to fund these losses in exchange for a future reward.

So far, it has largely worked, if you take the IPO-to-date performance of the stock, and its current absolute level of valuation.  The stock price has met resistance in the last six months as skepticism about ever reaching a sustainable level of above-industry profit margins has come to be questioned.

Assuming Tesla can outlive and outpace horrific quality issues (paint falling off, all sorts of things randomly not working, more service visits than any other car in the market by the widest of margin), the Model 3 is a strong product, almost alone in its corner of the industry’s segmentation.  One can see how it appeals to people who are unaware of the quality disasters or somehow feel that they can live with them. I suppose almost all customers are simply unaware of the quality issues. If they knew, they wouldn’t touch the car with a ten-foot pole.

Looking above the Model 3, we have seen how Tesla’s Model X and S sales have been crushed in recent months.  At the same time, first Jaguar i-Pace and then Audi eTron have entered the market and are now dwarfing Tesla’s X+S sales in most countries, and are, more or less, pulling even in the combined North American and European geographies (no Jaguar or Audi data from Asia yet).

Now, most recently, we saw the first registrations in that earliest of early adopter markets -- thanks exclusively to the highest subsidies in the world, by far -- of the next luxury BEV, the Mercedes EQC, on June 24.  These may be the customary dealer demo registrations that sometimes precede regular customer deliveries by as much as 1-4 months, but they are in any case an indication that regular customer deliveries of the Mercedes EQC are likely beginning by the third quarter, and possibly within as little as days or weeks from now.

I don’t expect the Mercedes EQC to be a “Tesla killer” in some sort of a rifle shot.  The car is, after all, not really any better than the Audi eTron or Jaguar i-Pace. It’s very similar, but by all accounts from those who have driven it, not any better.

Rather, it is just more bite into the flesh from one more attack-angle by what is about to be a swarm of competitors over the next 2-3 years.  Not any one of them may be a “Tesla killer” (although some future one might be), but it adds to the cumulative impact against which Tesla has to lower priced in order to stay afloat in the sales charts.

This cumulative impact on Tesla from new entrants such as the Mercedes EQC comes in two forms:

    1. Actual sales numbers.  Even if each new entry only takes a little bite, there will be so many competitors over the next 3 years that even if each model takes only 1% out of Tesla’s sales, there may be nothing left for Tesla in the end.
    2. The stock multiple.  Tesla enjoys a uniquely high multiple because it is viewed as special.  To some extent, it has been a very special product.  Good or bad, even bears have to admit that it has been unique.  All of these new products, however, will erode the market’s perception of Tesla as being “special.”  That means multiple compression in future years.  Therefore, even if Tesla’s sales and profit margins turn out to be “pretty good” in the quarters ahead, it may do little or nothing good for the stock.  With a declining multiple, the stock may go down almost no matter what.  That’s what the Mercedes EQC -- multiplied by 100x or more -- would do to Tesla’s stock multiple, whether based on sales or future estimated earnings.

PS—Here’s a link to the new Mercedes EQC, which he mentions: https://www.mbusa.com/en/future-vehicles/2020-eqc


What Happens After Amazon's Domination Is Complete?; The World's Cheapest Hospital Has to Get Even Cheaper; Is Sunscreen the New Margarine?

1) It seems like every day, a major newspaper runs a lead story on how the tech giants – or bad actors using the tech giants – are abusing their power. Here's the latest example in Sunday's New York Times: What Happens After Amazon's Domination Is Complete? Its Bookstore Offers Clues. Excerpt:

Amazon takes a hands-off approach to what goes on in its bookstore, never checking the authenticity, much less the quality, of what it sells. It does not oversee the sellers who have flocked to its site in any organized way.

That has resulted in a kind of lawlessness. Publishers, writers and groups such as the Authors Guild said counterfeiting of books on Amazon had surged. The company has been reactive rather than proactive in dealing with the issue, they said, often taking action only when a buyer complains. Many times, they added, there is nowhere to appeal and their only recourse is to integrate even more closely with Amazon.

The scope of counterfeiting across Amazon goes far beyond books. E-commerce has taken counterfeit goods from flea markets to the mainstream, and Amazon is by far the e-commerce heavyweight. But books offer a way to see the depths of the issue...

What happens after a tech giant dominates an industry is increasingly a question as lawmakers and regulators begin taking a harder look at technology companies, asking when dominance shades into a monopoly. This month, lawmakers in the House [of Representatives] said they were scrutinizing the tech giants' possible anticompetitive behavior. And the Federal Trade Commission is specifically examining Amazon.

In Amazon's bookstore, the unruly behavior has been widespread, aided by print-on-demand technology. Booksellers that seem to have no verifiable existence outside Amazon offer $10 books for $100 or even $1,000 on the site, raising suspicions of algorithms run wild or even money-laundering. The problem of fake reviews is so bad that the F.T.C. has already gotten involved.

My general view is to applaud these articles, which represent the best of investigative journalism. These all-powerful companies deserve a great deal of scrutiny, not only from the media, but also regulators, politicians and, of course, consumers.

The world has never seen power like this. It's Orwellian how much these companies know about us – our every purchase, thought, communication, and movement.

As the saying goes, with great power comes great responsibility... and I'm not sure the techno-geeks controlling these companies fully appreciate this. By and large, they sure haven't acted like it – with Facebook CEO Mark Zuckerberg at the top of my list, thanks to Roger McNamee's new book, Zucked: Waking Up to the Facebook Catastrophe. As I wrote in my June 14 e-mail:

I just finished reading (actually, listening to on Audible at my usual 2.75x speed) the new book, Zucked: Waking Up to the Facebook Catastrophe, which is a devastating critique of the tech giants, especially Facebook and Google (in particular, YouTube).

What makes it especially troubling is the author. One would expect plenty of criticism from the ACLU or Sen. Elizabeth Warren, but in this case, it's coming from lifelong tech industry insider, investor, and entrepreneur Roger McNamee. As an early mentor to Facebook CEO Mark Zuckerberg, he knows the man and the company better than almost anyone.

At one time, McNamee was a big supporter, but he has now pivoted 180 degrees because he's horrified by how the big social media platforms – Facebook and YouTube in particular – have been used by the companies and their advertisers to violate privacy and manipulate individuals and have been abused by the Russians to influence elections, etc. McNamee now believes these platforms are doing more harm than good and is calling for strong government intervention.

As a citizen, I share his concerns. But as an investor, I think that the government is unlikely to do anything that will materially disrupt the business models and dominance of the tech giants, so their stocks are likely to do well.

Here's a Washington Post review of the book: A former social media evangelist unfriends Facebook. Excerpt:

In March 2011, Roger McNamee, a 50-ish psychedelic rocker with a quirky side career in private equity, gave a TED Talk in the hippie enclave of Santa Cruz, Calif. McNamee, an early mentor to Mark Zuckerberg and an investor in Facebook, argued that the next 15 years would be all about boosting "engagement" – tech speak for getting users trapped inside digital platforms. Facebook, with its infinite empire of social ties, was a natural ally in achieving that mission. "If you do a start-up today in the social world, build it on top of Facebook," urged McNamee.

Eight years later, it seems McNamee has had a spiritual awakening. In those earlier days, had he been badly "zucked"? It's plausible, judging by his book, Zucked: Waking Up to the Facebook Catastrophe. These days McNamee proffers markedly different advice.

Engagement, it turns out, is just one of Facebook's bland euphemisms for getting users addicted to its services; its sinister aim is to produce "behavior modification that makes advertising more valuable." The McNamee of the 2019 vintage insists that no self-respecting start-up should get in bed with Facebook. While Twitter and Google also get a beating, McNamee mostly directs his rage at Facebook, the company he knows best, charging it with amplifying tribalism, allowing "bad actors" to "harm democracy," and even "shirking civic responsibility."

So, you might ask, why do I recommend the stocks of Amazon (AMZN), Facebook (FB), and Alphabet (GOOGL)? For the reason I cited above: The government is unlikely to do anything to materially disrupt these businesses.

The best outcome, both for humanity and investors, is breaking them up (which I think is highly unlikely)...

2) A remarkable story of entrepreneurship, innovation, and efficiency, with important lessons for both the developed and developing world. The World's Cheapest Hospital Has to Get Even Cheaper. Excerpt:

A pulmonary thromboendarterectomy, the surgery Shetty performed, can tie up an operating room for most of a day. In the U.S., the procedure can cost more than $200,000. Shetty did it for about $10,000 and turned a profit. A cardiac surgeon by training, Shetty is the founder and chairman of Narayana Health, a chain of 23 hospitals across India that may be the cheapest full-service health-care provider in the world. To American eyes, Narayana's prices look as if they must be missing at least one zero, even as outcomes for patients meet or exceed international benchmarks.

3) Both last week's official start of summer as well as all the sun I got this weekend in Albuquerque reminded me of this article from Outside magazine, which really rocked my world: Is Sunscreen the New Margarine?

It argues – quite persuasively, in my opinion – that instead of hiding from the sun and slathering ourselves with SPF 50 sunscreen, we should seek as much exposure to the sun as possible, while being careful to avoid sunburns. This is because the benefits of vitamin D, "a hormone manufactured by the skin with the help of sunlight [which is] difficult to obtain in sufficient quantities through diet [or supplements]," far outweigh the risk of skin cancer. Excerpt:

People with low levels of vitamin D in their blood have significantly higher rates of virtually every disease and disorder you can think of: cancer, diabetes, obesity, osteoporosis, heart attack, stroke, depression, cognitive impairment, autoimmune conditions, and more. The vitamin is required for calcium absorption and is thus essential for bone health, but as evidence mounted that lower levels of vitamin D were associated with so many diseases, health experts began suspecting that it was involved in many other biological processes as well.

And they believed that most of us weren't getting enough of it. This made sense. Vitamin D is a hormone manufactured by the skin with the help of sunlight. It's difficult to obtain in sufficient quantities through diet. When our ancestors lived outdoors in tropical regions and ran around half naked, this wasn't a problem. We produced all the vitamin D we needed from the sun.

But today most of us have indoor jobs, and when we do go outside, we've been taught to protect ourselves from dangerous UV rays, which can cause skin cancer. Sunscreen also blocks our skin from making vitamin D, but that's OK, says the American Academy of Dermatology, which takes a zero-tolerance stance on sun exposure: "You need to protect your skin from the sun every day, even when it's cloudy," it advises on its website. Better to slather on sunblock, we've all been told, and compensate with vitamin D pills.

Yet vitamin D supplementation has failed spectacularly in clinical trials...

The British Association of Dermatologists went even further in a statement, directly contradicting the position of its American counterpart: "Enjoying the sun safely, while taking care not to burn, can help to provide the benefits of vitamin D without unduly raising the risk of skin cancer."

Leffell, the Yale dermatologist, recommends what he calls a "sensible" approach. "I have always advised my patients that they don't need to crawl under a rock but should use common sense and be conscious of cumulative sun exposure and sunburns in particular," he told me.

This does not mean breaking out the baby oil or cultivating a burnished tan. All the experts agree that sunburns – especially those suffered during childhood and adolescence – are particularly bad.

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