Tesla did classic “kitchen sink” accounting in latest earnings

Whitney Tilson’s email to investors discussing Tesla thoughts; Beyond Meat below $100; Jeffrey Vinik to Shut Down Hedge Fund; Kenneth Fisher Ruled Investing. Then He Made a Sexist Joke.; My assistant Kelli.

Jeffrey Vinik

Hermann / Pixabay

1) I’m still analyzing Tesla’s (TSLA) earnings report – and awaiting the 10Q – but I have two general (and conflicting) views…

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Q3 2019 hedge fund letters, conferences and more

First, there's no question that reporting a positive net income, operating cash flow, and free cash flow quarter is impressive and unexpected. The stock is responding accordingly (thanks in part, no doubt, to the mother of all short squeezes).

Second, many of the numbers Tesla reported don't make sense. Sales exceeded production, but inventory went up by $200 million? Sequential revenue was down, but pre-tax profit rose by $546 million? Some funny things are going on here – and Tesla didn't provide much in the way of explanation in its earnings "update" (a 28-page slide deck) and conference call.

To be clear, I don't think there was outright fraud. Rather, I suspect the company did classic "kitchen sink" accounting in the first half of the year, whereby it took massive write-downs, and is now releasing the excess to make its third-quarter numbers look better than they really were. (Believe it or not, done "correctly," all of this is within the bounds of GAAP accounting – hence, it's not technically fraud, though it's certainly misleading...)

This Bloomberg article, Tesla's Surprise Looks Strangely Familiar, captures my suspicions well:

The profit and free cash flow figures also require scrutiny. Despite a slight drop in revenue, Tesla's pre-tax profit swung up by almost $550 million from the second quarter.

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Finally, I want to repeat some things I've said many times before...

  • I am not short Tesla (I'm not allowed to have positions in any stocks I write about), nor have I recommended shorting it in my newsletter, the Empire Investment Report (which is long-only).
  • Although I think Elon Musk is a less-than-stellar human being (to say the least), I have always acknowledged that he is a remarkable engineer and entrepreneur – what he has built at Tesla and SpaceX is truly extraordinary – and humanity owes him a debt of gratitude.
  • I write negatively about Tesla not because I'm rooting for the company to fail, but because I think the stock is extremely risky, with more downside than upside, and therefore warn my readers away from it. (Note: Since I warned investors to avoid the stock on March 21, when it was at $295, the S&P 500 is up 6% while Tesla is roughly flat.)

Today, I am neutral on the stock. I think it's a terrible long, but probably also not a good short right now, either. Over the next few months, the company will likely report positive developments regarding the launches of the Shanghai Gigafactory and Model Y. In addition, I suspect it has more kitchen-sink benefits it can use to spruce up its fourth-quarter earnings. So for now, I think the wisest course of action is to sit on the sidelines and perhaps look for an opportunity to short the stock early next year...

I cover the company on an almost-daily basis for those on my Tesla e-mail list. To sign up for it, simply send a blank e-mail to: tsla-subscribe@mailer.kasecapital.com.

One final note: I lost my charity bet with Andrew Left and a dozen other folks that Tesla wouldn't report a positive net income quarter this year, so I'll be donating $15,000 to various charities of their choice. I tip my hat to them...

2) While being bearish on Tesla hasn't been the right positioning for the last few months, pretty much all of my other big short calls have worked spectacularly...

For example, Beyond Meat (BYND) fell to my price target just below $100 yesterday in barely more than half the amount of time I predicted. On July 30, I wrote:

If you've been speculating in the stock of plant-based meat producer Beyond Meat (BYND), well, congratulations... but don't ever do that again. Speculating in the stocks of recent IPOs is a sure way to lose a lot of money, fast...

"But wait," you might say. "I just made a lot of money here!" To that, I reply with this story I recall Charlie Munger telling long ago: "If you run through a dynamite factory with an open torch and happen to get to the other side without blowing yourself sky high, that doesn't mean it was a good idea."

If you still hold Beyond Meat's stock, yesterday's announcement that insiders are dumping 3 million shares means that it's time to get out, even on a down day like today.

The setup here reminds me of cannabis company Tilray (TLRY) last September, when it briefly hit $300. At that very hour on live TV, I predicted that it would be down by 90% within a year... It closed yesterday at $40.64, down 86% since that call.

Both Tilray and Beyond Meat are real companies, not frauds, in exciting sectors that are sure to see tremendous growth. But trading at over 100 times trailing revenues, their stocks were or are caught up in obvious bubbles. The Beyond Meat one today isn't quite as extreme as Tilray's was at its peak, so I'll make a somewhat more conservative forecast: The stock will be cut in half – below $100 – by the end of the year.

Less than three months later, the stock closed yesterday at $97.90. (And Tilray, despite having already fallen 86%, has been nearly cut in half over the same period, closing yesterday at $22.63. It reminds me of the old saying: "What do you call a stock down 90%?" Answer: "A stock that was down 80%... and then got cut in half!")

So is it time to start thinking about bottom-fishing in Beyond Meat, now that it's down nearly 60% from its July peak? I think not. While, as I wrote on August 1, "there is a compelling case to be made for Beyond Meat, Impossible Foods, and 'alt meat' in general," its valuation is still absurd, with an enterprise value of around $6 billion and a stock trading at 37 times trailing revenue.

3) Wow, when an established veteran like Jeffrey Vinik struggles to raise money, it really underscores how tough things are for stock-picking hedge funds... Billionaire Stock Picker Jeffrey Vinik to Shut Down Hedge Fund - Wall Street Journal. Excerpt:

In an investor letter dated Wednesday announcing his decision, Mr. Vinik, 60, wrote, "It has been much harder to raise money over the last several months than I anticipated."...

4) Speaking of established veterans, Ken Fisher sure has gotten himself in a heap of trouble with what my mom calls "diarrhea of the mouth" (usually used to chastise me!). Some good lessons here of which every public figure should take note... This article, Kenneth Fisher Ruled Investing. Then He Made a Sexist Joke - The New York Times., is from the front page of the business section of today's New York Times. Excerpt:

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And CNBC obtained an audiotape of a 2018 conference in which Mr. Fisher compared selling a mutual fund to asking a woman in a bar for sex.

5) Now that I'm no longer managing money, I'd like to find a great home at a NYC-based fund for my longtime right-hand person, Kelli Alires.

She has a unique skillset that would be invaluable to a small, independent fund manager like I was – I'd guess the sweet spot would be someone managing at least $50 million and looking to grow.

If you're interested, please contact Kelli directly at ka@kaselearning.com.

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