Tesla Is Losing A Ton Of Money And Has A Terrible Balance Sheet

Stanphyl Capital’s letter to investors for the month ended August 31, 2019.

Telsa Terrible Balance Sheet

dominickvietor / Pixabay

Friends and Fellow Investors:

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q2 hedge fund letters, conference, scoops etc

For August 2019 the fund was up approximately 6.8% net of all fees and expenses. By way of comparison, the S&P 500 was down approximately 1.6% while the Russell 2000 was down approximately 4.9%. Year-to-date 2019 the fund is up approximately 19.4% while the S&P 500 is up approximately 18.3% and the Russell 2000 is up approximately 11.8%. Since inception on June 1, 2011 the fund is up approximately 96.4% net while the S&P 500 is up approximately 158.7% and the Russell 2000 is up approximately 97.6%. Since inception the fund has compounded at approximately 8.5% net annually vs 12.2% for the S&P 500 and 8.6% for the Russell 2000.  (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two and please note that individual partners’ returns will vary in accordance with their high-water marks.

The fund remains very net short, as I continue to believe we’re entering a bear market for U.S. stocks as the U.S. economic slowdown worsens. Here are some charts explaining why:

Stanphyl Capital

Stanphyl Capital

Terrible Balance Sheet

Terrible Balance Sheet

…while global negative yielding debt (a sign of a massive looming economic slowdown) has broached the insane level of nearly $17 trillion:

Terrible Balance Sheet

And have a look at how ugly U.S. rail traffic is.

In fact, pretty much the only good economic news out this month were a slightly rebounding Chicago PMI (to 50.4 within an overall trend that’s clearly ugly)…

Terrible Balance Sheet

…and a July retail sales figure which doesn’t look much different to me from what we saw in 2007, just before “economic Armageddon”:

Terrible Balance Sheet

And keep in mind that much of the U.S. bull market’s rise came from corporate buybacks and those tend to slow drastically when the economy does. As the looming recession unfolds and those buyers disappear, look out below.

On the other hand the short-lived era of net “quantitative tightening” among the big three central banks (the Fed, ECB and BOJ) is over. The Fed’s balance sheet contraction stopped in August and it’s rumored that in October the ECB will resume printing money to buy still more bonds while, the BOJ continues doing so. I’m very aware of the effect these moves may have on already grossly inflated asset prices, and thus I’m a bit more cautious in my short bias than I had been before the new European QE was telegraphed at July’s ECB meeting. On the other hand, this ECB stupidity may blow up its banks and perhaps even the euro, resulting in all kinds of stock market carnage. After all, if printing money is the solution to economic stagnation, why bother collecting taxes and having government budgets? (There’s no need to answer that—it’s a rhetorical question!) So we’re very short, but prepared to cover quickly if necessary!

Also, stocks are not at all pricing in the increasing possibility of a Democratic presidency. Trump’s corporate tax cuts juiced earnings by an instant 10% or so and his easier regulatory environment may have helped earnings by another couple of percent. This would be almost instantly reversed (and then some!) by any Democratic candidate, all of whom have also endorsed strict limits on the corporate stock buy-backs that have been another huge force behind this bull market.

Although stocks have often done well during Democratic administrations, we’re now in a unique situation due to the three factors (tax rates, buybacks and regulation) I mentioned above, as well as the fact that Trump is running budget deficits that would make any Democrat “proud,” thus leaving minimal room for a new administration to increase them.

Thus, seeking the most overvalued of all stock indices (and the one least likely to be bought by overseas investors with their newly printed yen and euros), we remain short the Russell 2000 (IWM), which has a trailing twelve-month GAAP PE ratio of 43 on what I believe are peak earnings, while 35% of its constituents lose money. We’ve also been short the S&P 500 (SPY) since Trump said it’s likely China won’t make a trade deal until after the 2020 Presidential election, as rumors of such a deal have been a huge positive driver of stocks and international trade is much more important for the constituents of the S&P 500 than it is for those in the Russell 2000.

Elsewhere in the fund’s short positions…

We remain short stock and call options in Tesla Inc (NASDAQ:TSLA), which I consider to be the biggest single stock bubble in this whole bubble market. The core points of our Tesla short thesis are:

  • Tesla has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of electric car design or technology, while existing automakers—unlike Tesla­—have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably.
  • Tesla is losing a ton of money and has a terrible balance sheet.
  • Tesla is now a “busted growth story”; demand for its existing models is only being maintained via continual price reductions, and it will have to raise billions of dollars to produce new models in a market soon to be saturated with enormous competition.
  • Elon Musk is extremely untrustworthy.

Tesla’s stock got a bit of a pop today on news that China would exempt its cars—as it’s doing for all EVs—from a 10% sales tax (an exemption scheduled to end in December 2020). Offsetting this for Tesla is a 2%+ price increase announced today to offset some of the yuan’s depreciation against the dollar (with Tesla’s margins eating the rest of the depreciation), so this is essentially just an 8% price cut until (absent a trade deal) tariffs increase from 15% to 40% on December 1st and prices thus become massively higher. Now, let’s put this in perspective…

Tesla currently sells around 24,000 cars a year in China including all its models. The rule of thumb for the elasticity of auto pricing is that every 1% price cut results in a sales increase of 1% to 2.4%. If we (generously) use 24,000 as a baseline number just for current Model 3 sales and (again, generously) a 2.4x “elasticity multiplier,” domestically produced Model 3s that are 25% cheaper (due to the 10% sales tax savings plus the 15% tariff savings) would result in annual sales of 38,400 Model 3s (additional sales of 25% x 2.4 = 60% more), meaning Tesla’s new Chinese factory would be a massive money-loser as it

would be running at only 26% of its initial 150,000-unit annual capacity. And here’s a great overview (from today’s Wall Street Journal) of what a dogfight the Chinese EV market has become.

In July Tesla released a disastrous Q2 financial report, with a GAAP loss of $408 million despite higher-than-expected deliveries of a bit over 95,000 cars. In fact, due to massive price cuts to maintain demand, Tesla actually booked significantly less revenue than it did in Q4 2018 when it sold nearly 5000 fewer cars, and despite multiple price cuts since January 1, Tesla's estimated U.S. deliveries dropped by 43 percent in the first half of this year vs. the second half of 2018, and overall deliveries were down by 9% despite this year’s introduction of Model 3 sales to Europe & Asia where it was unavailable in 2018. And to kick off Q3 (the quarter we’re in now), Tesla cut prices yet again!

Keep in mind too that Tesla’s Q2 loss would likely have been $100 million greater if it were providing adequate customer service. The internet is filled with complaints from aggrieved owners who can’t reach anyone to fix their myriad problems within a reasonable timeframe, thereby resulting in real-time brand destruction. Yet due to the high cost of batteries, Teslas are inherently unprofitable, and thus improving the ownership experience would only increase the company’s losses. In other words, Tesla is truly a non-viable business.

In Q3 & Q4 2019 the “growth company” known as Tesla will show significant revenue declines vs. Q3 & Q4 2018 (so much for those “year-over-year comps”!), and its 2019 full-year GAAP loss will be roughly $2 billion.

The party’s over, folks. With no profitable growth, massive ongoing losses and tens of billions of dollars in debt and purchase obligations, the equity in Tesla will eventually prove worthless. Yet as the stock miraculously closed today at $225.61/share, I shall continue…

For those of you looking for a resumption of growth from Tesla’s (supposedly) upcoming Model Y, by the time it’s available in late 2020 (if Tesla is still in business), it will both massively cannibalize sales of the Model 3 sedan and face superior competition from the much nicer electric Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 and Volkswagen ID Crozz, while less expensive and available now are the excellent new all-electric Hyundai Kona and Kia Niro, 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. Meanwhile, the Model 3 sedan will have terrific direct “sedan competition” in 2020 from Volvo’s beautiful new Polestar 2, the BMW i4 and the premium version of Volkswagen’s ID.3.

Meanwhile, sales of Tesla’s highest-margin cars (the Models S&X) are down by nearly 40% worldwide this year, thanks partially to cannibalization from the Model 3 but primarily due to the recently introduced Audi e-tron and Jaguar I-Pace, and this sales drop is before this fall’s arrival of the Mercedes EQC and Porsche Taycan, with multiple additional electric Audis, Mercedes and Porsches to follow, many at starting prices considerably below those of the high-end Teslas. (See the links below for more details.) In fact, the fantastic Porsche Taycan alone may drive Model S sales down to approximately “zero”.

And if you think China will be the saving grace for Tesla, I have bad news for you: first, the competition there for EV market share is becoming a vicious dogfight (see the links further down in this letter). Second, Tesla currently sells fewer than 25,000 Model 3s a year in China; how much would that increase with a domestically produced car and a 20% price cut (the tariff & labor savings)? Even more than doubling sales to, say, 50,000 a year would leave its new Chinese factory hugely unprofitable, and would be a drop-in-the-bucket vs. the “China expectations” built into the stock price. And meanwhile Beijing is switching its subsidies to hydrogen fueled cars, which it perceives as better than EVs.

Meanwhile, Tesla has the most executive departures I’ve ever seen from any company; here’s the astounding full list of escapees. 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 and massive additional liabilities make the company too late to “fix” without major financial and operational restructuring.

In May Consumer Reports completely eviscerated the safety of Tesla’s so-called “Autopilot” system; in fact, Teslas have far more pro rata (i.e., relative to the number sold) deadly incidents than other comparable new luxury cars; here’s a link to those that have been made public. Meanwhile Consumer Report’s annual auto reliability survey ranks Tesla 27th out of 28 brands and the number of lawsuits of all types against the company continues to escalate-- there are now over 700 including a real beauty in August from Wal-Mart which was a victim of a secret Tesla cover-up of solar roof fires, and the whistleblowers keep on coming!

So here is Tesla’s competition in cars (note: these links are regularly updated)…

The Audi e-tron: Electric Has Gone Audi

Audi e-tron Sportback comes early 2020

AUDI E-TRON GT FIRST DRIVE: LOOK OUT, TESLA (available 2020)

Audi's Q4 e-tron previews entry-level EV for 2021

Porsche Electric Taycan Launches Late 2019

Porsche Taycan Cross Turismo to launch in 2020 after Taycan Sedan

The next generation of the Porsche Macan will be electric

THE AWARD-WINNING ALL-ELECTRIC JAGUAR I‑PACE

Jaguar Land Rover readies electric XJ and Range Rover

Mercedes EQC Electric SUV Available Mid-to-Late 2019

Mercedes EQV Electric Minivan Revealed – Available Early 2020

Mercedes EQB Small SUV to boost brand's electric line-up

Mercedes to launch more than 10 all-electric models by 2022

VW 2020 Fully Electric Hatchback ID 3 starts taking deposits in Europe

VW ID Crozz 2020 Small Electric SUV- >300-mile range, 150kw charging

VW Group to launch 70 pure electric cars over the next decade

258-Mile Hyundai Kona electric is available now for under $40,000

239-Mile Kia Niro EV is Available Now For Under $40,000

Kia Soul (available mid-2019) EV’s Range Jumps to 243 Miles

Kia Europe to have six pure electric models by 2022

Chevrolet Bolt Offers 238 Miles On A Single Charge
GM is transforming Cadillac into an electric brand

Nissan LEAF e+ with 226-mile range is available now

Nissan Leaf-based SUV coming in 2020

The 2020 Volvo Polestar 2 Is Priced to Beat Tesla’s Best-Selling Model 3

Volvo XC40 full-electric variant to debut later this year

BMW iX3 electric crossover goes on sale in 2020

New BMW i4: fresh shots reveal electric saloon's design

BMW’s 2021 iNEXT Returns In New Teasers Showing Prototypes Production

Ford’s Mustang-inspired electric performance SUV arrives in 2020 with >300-mile range

Ford plans family of EVs targeted at Europe

Ford Accelerates Its Electric-Vehicle Push With $500 Million Stake in Rivian

Rivian (electric pick-up truck maker) Announces $700M Investment Round Led By Amazon

Toyota to market over 10 battery EV models in early 2020s

Renault upgrades Zoe electric car as competition intensifies

Peugeot 208 to electrify Europe's small-car market

Peugeot to offer EV version of new 2008 small crossover

Toyota and Subaru Agree to Jointly Develop BEV-dedicated Platform and BEV SUV

Mazda counts on EVs to reach EU CO2 goal

Infiniti will go mostly electric by 2021

DS 3 Crossback will give PSA's upscale brand an electric boost

Smart Will Electrify Its Entire Line-up By 2020

SEAT will launch 6 electric and hybrid models and develop a new platform for electric vehicles

Opel sees electric Corsa as key EV entry

Opel/Vauxhall will launch electric SUV and van in 2020

Skoda accepting deposits for electric cars

New Citroen C4 Cactus to be first electrified Citroen in 2020

MG E-Motion confirms new EV sports car on the way by 2020

FCA to invest $788M to build new 500 EV in Italy

Rolls-Royce is preparing electric Phantom for 2022

Honda will offer full-EV or hybrid tech on every European model by 2025

Bentley mulls electric car to help reduce carbon footprint

Korando will lead SsangYong's push into electrification

Dyson electric car: new patents show mould-breaking design

Lucid Motors closes $1 billion deal with Saudi Arabia to fund electric car production

Borgward BXi7 Electric SUV Flies Under The Radar

Detroit Electric promises 3 cars in 3 years

Two new electric cars from Mahindra in India by 2019; Global Tesla rival e-car soon

Saab asset owner NEVS plans electric car production

EV startup Canoo will only sell cars on a subscription basis

And in China…

Volkswagen takes over leading position for electro-mobility in China

SAIC Volkswagen to roll out 3 MEB-based EV models in 2020/2021

Audi Q2L e-tron debuts at Auto Shanghai

Audi will build Q4 e-tron in China

Audi China to roll out 12 locally-produced models in total by 2022

BYD launches EV535, all-electric SUV

BYD Song MAX BEV version with 500km range to hit market in 2019

2019 BYD Yuan EV360 goes on sale with prices starting RMB89,900 after subsidy

BYD e2 all-electric crossover rolls off production line in Changsha

Top of Form

Bottom of Form

Daimler & BYD launch new DENZA electric vehicle for the Chinese market

BAIC and Daimler to Build $1.9 Billion China Plant

BAIC brings EX5 Electric SUV to market

BAIC BJEV, Magna ready to pour RMB2 bln in all-electric PV manufacturing JV

Daimler to Start EQC Electric SUV Production in China in 2019

Daimler and BMW to cooperate on affordable electric car in China

BMW will develop and produce electric Mini in China

GM unveils Chevrolet Menlo EV electric car

Buick Rolls Out First Electric Car for China

GM China raises new-energy vehicle target to 20 models through 2023

Nissan & Dongfeng to invest $9.5 billion in China to boost electric vehicles

Toyota unveils first electric SUVs at Shanghai motor show

Toyota, BYD will jointly develop electric vehicles for China

Hyundai is building EV factories in China and Indonesia

CATL and Toyota Form Comprehensive Partnership for New Energy Vehicle Batteries

Nio’s ES8 Electric Crossover debuts with half the Tesla Model X’s price tag

Nio begins deliveries of new ES6 electric crossover in China (at 1/2 the price of Tesla X)

NIO’s Compact SUV NIO ES3 To Debut at the end of 2019

This is NIO’s Tesla Model 3 and Polestar 2 rival

GAC unveils new NEV offshoot dubbed HYCAN

GAC New Energy Launches AION LX, EV SUV With NEDC Range of 403 miles

GAC NE to roll out 12 new models for Aion series, including solar-powered models

Ford ramps up electric vehicle push in China

Jaguar Land Rover's Chinese arm invests £800m in EV production

SAIC building factory in China for EVs from Roewe and MG

Renault and Brilliance Automotive to build 3 new electric light commercial vehicles for China

Honda launches new all-electric Everus VE-1 for ~$25,000 in China

Honda to roll out over 20 electric models in China by 2025

Geely all-new BEV sedan Jihe A starts at RMB150,000

Geely unveils GE11 compact BEV

New Geely Emgrand GSe crossover has EV range up to 400km

Geely launches new electric car brand 'Geometry'

Hongqi starts selling electric SUV with 400km range for $32,000

Changan New Energy to launch three NEV platforms by 2020

Mazda and Changan Auto join hands on electric vehicles

Xpeng Motors Launches G3 2020 Edition - 520 km NEDC range furthest in its class

Xpeng Motors premiers the P7 intelligent electric coupe

WM Motors/Weltmeister EX5 Electric SUV Launched On The Chinese Car Market

Chery Breaks Ground on $240M EV Factory in China

Chery's second EV plant open in Dezhou

Seres launches production SF5 sleek 684HP electric crossover with 300 miles of range

Byton M-Byte electric SUV tackles cold-weather testing, nears production

DearCC Launches ENOVATE Electric SUV

Guangzhou Auto To Launch Four New Electric Cars By 2020

Great Wall Launches New EV Brand (ORA) In China

Singulato iS6 Electric SUV Debuts With 249-Mile Range

Singulato, BAIC partner to promote smart new energy vehicles

Hongqi launches E-HS3 BEV SUV with AWD option, 390km range and 0-100kh/h in 5.9 seconds

FAW (Hongqi) to roll out 15 electric models by 2025

JAC Motors releases new product planning, including many NEVs

Seat to make purely electric cars with JAC VW in China

ICONIQ to build electric cars in Zhaoqing with total investment of RMB 16 billion

Quianu Motor aims to grab share of US electric vehicle market

Hozon Kicks Off Mass Production With All-Electric Neta N01

EV maker Bordrin skips flash, keeps real-car focus

Aiways U5 long-range electric SUV

NEVS launches electric-car output with Saab 9-3 platform in China

Youxia Motors raises $1.25 billion to start 2019 EV production

Lixiang To Start Electric SUV Production In Late 2019

CHJ Automotive buys Lifan for shortcut to EV production

Infiniti to launch Chinese-built EV in 2022

Zotye Auto to roll out 10 plus NEV models by 2020

Wanxiang Gets China Electric Vehicle Permit to Make Karma Cars

Qoros Auto's new owner plans to be an EV power

JMC (Jianling Motor Corp.) Starts New EV Brand In China

Thunder Power Chinese EV manufacturer clinches deal with Belgian investment fund

Leapmotor raises RMB2.5 billion for Series A round to build electric cars

Continental, Didi sign deal on developing EVs for China

Here’s Tesla’s competition in autonomous driving…

Consumer Reports finds Tesla's Navigate on Autopilot is far less competent than a human driver

Navigant Ranks Tesla Last Among Automakers & Suppliers for Automated Driving

Tesla has a self-driving strategy other companies abandoned years ago

Waymo and Lyft partner to scale self-driving robotaxi service in Phoenix

Jaguar and Waymo announce an electric, fully autonomous car

Renault, Nissan partner with Waymo for self-driving vehicles

Fiat Chrysler partners with Aurora to develop self-driving commercial vans

Hyundai and Kia Invest in Aurora

Cadillac Super Cruise™ Sets the Standard for Hands-Free Highway Driving

Honda Joins with Cruise and General Motors to Build New Autonomous Vehicle

SoftBank Vision Fund to Invest $2.25 Billion in GM Cruise

Ford-VW alliance with Argo could redraw self-driving sector

VW taps Baidu's Apollo platform to develop self-driving cars in China

Audi to join Daimler, BMW self-driving tech alliance

Daimler's heavy trucks start self-driving some of the way

SoftBank, Toyota's self-driving car venture adds Mazda, Suzuki, Subaru Corp, Isuzu Daihatsu 

Volvo, Nvidia expand autonomous driving collaboration

Continental & NVIDIA Partner to Enable Production of Artificial Intelligence Self-Driving Cars

Intel’s Mobileye has 2 million cars (VW, BMW & Nissan) on roads building HD maps

Nissan gives Japan version of Infiniti Q50 hands-free highway driving

Nissan and Mobileye to generate, share, and utilize vision data for crowdsourced mapping

Magna joins the BMW Group, Intel and Mobileye platform as an Integrator for AVs

Uber unveils next-generation Volvo self-driving car

Toyota to join Baidu's open-source self-driving platform

Baidu, WM Motor announce strategic partnership for L3, L4 autonomous driving solutions

Baidu plans to mass produce Level 4 self-driving cars with BAIC by 2021

Volvo, Baidu to co-develop EVs with Level 4 autonomy for China

Geely selects Volvo, Veoneer joint venture as autonomous tech supplier

BMW and Tencent to develop self-driving car technology together

BMW, NavInfo bolster partnership in HD map service for autonomous cars in China

Tencent, Changan Auto Announce Autonomous-Vehicle Joint Venture

Huawei looks to self-driving cars in bid to broaden AI focus

BYD partners with Huawei for autonomous driving

Lyft, Magna in Deal to Develop Hardware, Software for Self-Driving Cars

Deutsche Post to Deploy Test Fleet Of Fully Autonomous Delivery Trucks

ZF autonomous EV venture names first customer

Magna’s new MAX4 self-driving platform offers autonomy up to Level 4

Groupe PSA’s safe and intuitive autonomous car tested by the general public

Apple acquires self-driving startup Drive.ai

Self-driving startup Momenta ready to launch fully automated driving solution in Q3 2019

JD.com Delivers on Self-Driving Electric Trucks

NAVYA Unveils First Fully Autonomous Taxi

Fujitsu and HERE to partner on advanced mobility services and autonomous driving

Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology

First Look Inside Zoox’s Autonomous Taxi

Nuro’s Robot Delivery Vans Are Arriving Before Self-Driving Cars

Here’s Tesla’s competition in car batteries…

LG Chem targets electric car battery sales of $6.3 billion in 2020

LG Chem to build $1.8 bln EV battery plant in China

LG Chem considering building 2nd U.S. EV battery plant

Samsung SDI Unveils Innovative Battery Products at 2018 Detroit Motor Show

SK Innovation to boost EV battery production capacity more than tenfold by 2022

New Toshiba EV Battery Allows 320km Charge in 6 Minutes

Daimler starts building electric car batteries in Tuscaloosa – one of 8 battery factories

Panasonic Opens New Automotive Lithium-Ion Battery Factory in Dalian, China

Panasonic forms battery partnership with Toyota

CATL’s Chinese battery factory will be bigger than Tesla’s Gigafactory

CATL to set up battery cell manufacturing in Germany

BYD to quadruple car battery output with lithium site plants

GM inaugurates battery assembly plant in Shanghai

VW, BMW invest in Swedish battery cell producer Northvolt

Volkswagen building battery cell plant in Germany

VW Wants to One-Up Tesla With a Next-Generation Battery

Toyota accelerates target for EV with solid-state battery to 2020

PSA to assemble batteries for hybrid, electric cars in Slovakia

Honda Partners on General Motors' Next Gen Battery Development

Energy Absolute Plots Asian Project Rivaling Musk's Gigafactory

France's Saft plans production of next-gen lithium ion batteries from 2020

FREYR AS to build a 32 GWh battery facility in Norway

Great Wall-linked battery maker SVOLT Energy plans factory in Europe

Chinese Battery Maker to Open Factory Next to Swedish EV Plant

Sokon aims to be global provider of battery, electric motor, electric control systems

BMW Group invests 200 million euros in Battery Cell Competence Centre

BMW Brilliance Automotive opens battery factory in Shenyang

BMW announces partnership with solid-state battery company

Hyundai Motor developing solid-state EV batteries

Wanxiang is playing to win, even if it takes generations

UK provides millions to help build more electric vehicle batteries

Rimac is going to mass produce batteries and electric motors for OEMs

Elon Musk Has A New Battery Rival (Romeo Power) Packed With His Ex-Employees

Evergrande acquires Cenat battery production

Bracing for EV shift, NGK Spark Plug ignites all solid-state battery quest

ProLogium Technology Will Produce First Next Generation Lithium Ceramic Battery For EVs

Here’s Tesla’s competition in charging networks…

Electrify America: Our Investment Plan

EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US

Tritium’s First 350-kW DC Fast Chargers Coming To U.S.

Porsche plans network of 500 fast chargers for U.S.

ChargePoint To Equip Mercedes Dealerships With 150kw Charging Stations For EQC

Recargo Ultrafast West Coast Charging

GM and Bechtel plan to build thousands of electric car charging stations across the US

BMW, Daimler, Ford, VW, Audi & Porsche form IONITY European 350kw Charging Network

E.ON to have 10,000 150KW TO 350KW EV charging points across Europe by 2020

Volkswagen plans 36,000 charging points for electric cars throughout Europe

Enel kicks off the E-VIA FLEX-E project for the installation of European ultra-fast charging stations

Allego Orderes 90 Efacec 350 kW Ultra-Fast Chargers

Allego & Fortum Launch MEGA-E High Power Charging network for Europe’s Metropolitan areas

ChargePoint Secures $240 Million in Additional Funding; $500 million raised in total

UK's Podpoint installing 150kW EV rapid chargers this year; 350kW by 2020

UK National Grid plans 350kW EV charge point network

BP Chargemaster’s 150kW UK network to allow 30min electric car charging at 50 sites this year

Fastned building 150kw-350kw chargers in Europe

Deutsche Telekom to build electric car charging network in Germany

ABB powers e-mobility with launch of first 150-350 kW high power charger

Shell buys European electric vehicle charging pioneer NewMotion

Total planning EV charging points at its French stations

Volkswagen, FAW Group, JAC Motors, Star Charge formally announce new EV charging JV

BP, Didi Jump on Electric-Vehicle Charging Bandwagon

Evie Networks To Install 42 Ultra-Fast Charging Sites In Australia

And here’s Tesla’s competition in storage batteries…

Panasonic

Samsung

LG

BYD

AES + Siemens (Fluence)

GE

Bosch

Mitsubishi Hitachi

NEC

Toshiba

ABB

Saft

Johnson Contols

EnerSys

SOLARWATT

Schneider Electric

Sonnen

Kyocera

Kokam

NantEnergy

Eaton

Nissan

Tesvolt

Kreisel

Leclanche

Lockheed Martin

EOS Energy Storage

ESS

UET

electrIQ Power

Belectric

Stem

ENGIE

Redflow

Renault

Primus Power

Simpliphi Power

redT Energy Storage

Murata

Bluestorage

Adara

Blue Planet

Tabuchi Electric

Aggreko

Orison

Moixa

Powin Energy

Nidec

Powervault

Schmid

24M

Ecoult

Innolith

LithiumWerks

Natron Energy

Energy Vault

Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???

Elon Musk Settles SEC Fraud Charges

Elon Musk, June 2009: “Tesla will cross over into profitability next month”

Tesla SEC Correspondence Shows A Pattern Of Inaccurate, Incomplete & Misleading Disclosures

Tesla: Check Your Full Self-Driving Snake Oil Expiration Date

As Musk Hyped and Happy-Talked Investors, Tesla Kept Quiet About a Year-Long SEC Probe

The Truth Is Catching Up With Tesla

With Misleading Messages And Customer NDAs, Tesla Performs Stealth Recall

Who You Gonna Believe? Elon Musk's Words Or Your Own Lying Eyes?

How Tesla and Elon Musk Exaggerated Safety Claims About Autopilot and Cars

When Is Enough Enough With Elon Musk?

Musk Talked Merger With SolarCity CEO Before Tesla Stock Sale

Tesla Continues To Mislead Consumers

Tesla Misses The Point With Fortune Autopilot Story

Tesla Timeline Shows Musk's Morality Is Highly Convenient

Tesla Scares Customers With Worthless NDAs, The Daily Kanban Talks To Lawyers

Tesla: O, What A Tangled Web We Weave When First We Practice To Deceive

Tesla's Financial Shenanigans

Tesla: A Failure To Communicate

Can You Really Trust Tesla?

Elon Musk Appears To Have Misled Investors On Tesla's Most Recent Conference Call

Understanding Tesla’s Potemkin Swap Station

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 is larger than Ford’s and roughly 75% of GM’s despite selling only around 350,000 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 over $50 billion enterprise value and—thanks to roughly $34 billion in debt, purchase and lease obligations—may eventually be worth “zero.”

Elsewhere among our short positions…

We continue (since late 2012) to hold a short position in the Japanese yen via the Proshares UltraShort Yen ETF (ticker: YCS) as Japan (despite having substantially tapered its QE)  continues to print nearly 4% of its monetary base per year after quadrupling that base since early 2013. In 2018 the BOJ bought approximately 67% of JGB issuance and in 2019 it anticipates buying 70%! In fact, the BOJ’s balance sheet is now larger than the entire Japanese economy:

Terrible Balance Sheet

…and it owns nearly 78% (!) of the country’s ETFs by market value.

Just the interest on Japan’s debt consumes 8.9% of its 2019 budget despite the fact that it pays a blended rate of less than 1%. What happens when Japan gets the 2% inflation it’s looking for and those rates average, say, 3%? Interest on the debt alone would consume nearly 27% of the budget and Japan would have to default! But on the way to that 3% rate the BOJ will try to cap those rates by printing increasingly larger amounts of money to buy more of that debt, thereby sending the yen into its death spiral.

When we first entered this position USD/JPY was around 79; it’s currently in the 106s and long-term I think it’s headed a lot higher—ultimately back to the 250s of the 1980s or perhaps even the 300s of the ‘70s before a default and reset occur.

We continue to hold a short position in the Vanguard Total International Bond ETF (ticker: BNDX), comprised of dollar-hedged non-US investment grade debt (over 80% government) with a ridiculously low “SEC yield” of 0.36% at an average effective maturity of 9.8 years, and with Eurozone inflation now printing 1.1% annually I believe this ETF is a great way to short what may be the biggest asset bubble in history. Currently the net borrow cost for BNDX provides us with a positive rebate of 1.4% a year (more than covering the yield we pay out) and as I see around 5% potential downside to this position (vs. our basis, plus the cost of carry) vs. at least 20% (unlevered) upside, I think it’s a terrific place to sit and wait for the inevitable denouement of this insanity.

We also have relatively small short positions in Netflix (NFLX) due to its egregious valuation within the context of increasing cash burn and competition (particularly from Disney), Square (SQ) due to its egregious valuation and a stock-dumping CEO who so effusively praises (and enables) Elon Musk that I suspect he’s equally untrustworthy (and indeed in June the company fired its auditor), Carvana (CVNA) due to a laughable business model with escalating losses, a founder with a sketchy past and insiders who dump stock steadily, and Wayfair (W), an egregiously bad on-line furniture business with yet another team of insider stock-dumpers.

And now for the fund’s long positions…

We continue to own Communications Systems, Inc. (ticker: JCS), an IOT (“Internet of Things”) and internet connectivity & services company. The company’s multiple divisions are best explained by the slide presentation from its annual meeting and this terrific recent contract, and its recently improved performance is highlighted in its Q2 earnings report; what attracted me to JCS is its great balance sheet and how cheap it is on an EV-to-revenue basis. At our average cost of $3.04/share and assuming $62 million in annual revenue, $17.8 million of net cash and 9.32 million shares outstanding, we paid just a bit over 0.17x revenue for this roughly break-even company with a gross margin of 37% and climbing.

We continue to own Aviat Networks, Inc. (ticker: AVNW), a designer and manufacturer of point-to-point microwave systems for telecom companies, which in August reported a solid FY 2019 Q4, with revenue up slightly year-over-year accompanied by a significant improvement in operating income. More importantly, the company guided to a very strong first half of FY 2020 (which began July 1, 2019), with income and cash flow up substantially year-over-year. Additionally, Aviat has $408 million of U.S. NOLs, $8 million of U.S. tax credit carryforwards, $212 million of foreign NOLs and $2 million of foreign tax credit carryforwards; thus its income will be tax-free for many years so GAAP EBITDA less capex essentially equals “earnings.” Valuation-wise, if we assume $14 million in FY 2020 adjusted EBITDA (first-half guidance is $7.5 million) and remove $1.7 million in stock comp and $5.3 million in capex we get $7 million in earnings multiplied by, say, 14 = approximately $98 million; if we then add in approximately $37 million of expected year-end net cash we get $135 million, and if we divide that by 5.4 million shares we get an earning-based valuation of around $25/share. Alternatively, if we look at Aviat as a buyout candidate its closest pure-play competitor, Ceragon (CRNT) sells at an EV of approximately 0.5x revenue, which for AVNW (assuming $240 million in 2020 revenue) would be 0.5 x $240 million =$120 million + $37 million expected year-end net cash = $157 million. If we value Aviat’s massive NOLs at a modest $10 million (due to change-in-control diminution in their value), the company would be worth $167 million divided by 5.4 million shares = just under $31/share.

We continue to own Westell Technologies Inc. (WSTL), which in August replaced its CEO for the umpteenth time (and its CFO left for a larger company) after reporting an awful FY 2020 Q1, with revenue down 31% year-over-year and a drop in gross margin from 45.5% to 36.1% and negative free cash flow of around $1.2 million; about the only good news here is that the company ended the quarter with $24 million in cash and no debt. That said, we continue to own Westell because it now sells at an enterprise value of approximately negative $2 million, so on that metric it’s dirt cheap (although clearly the business needs to stabilize and grow). Westell also suffers from a dual share class with voting control held by descendants of the founder, yet the company is so cheap on an EV-to-revenue basis that if management can’t start generating meaningful profits it seems primed for a strategic buyer to acquire it. Assuming 15.6 million shares, an acquisition price of just 0.6x run-rate annual revenue of $36 million would (on an EV basis) would be nearly $3/share.

We continue to own a small position in the PowerShares DB Agriculture ETF (ticker: DBA), as agricultural products remain the most beaten-down sector I can find that isn’t a “buggy whip” (something on the way to obsolescence) or cyclical from a demand standpoint; however, I reduced this position size considerably in July when near-term hopes for a trade deal with China fell apart and terrible weather in the farm belt was unable to move prices meaningfully higher.

Thanks and regards,

Mark Spiegel




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