Tesla’s 3Q19 (not) miraculous CGS improvement

Whitney Tilson’s email to investors discussing the many excellent comments from his readers on Telsa.

1) A reader’s comment:

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Q3 2019 hedge fund letters, conferences and more

What we learn in the 10-Q is guaranteed -- as always -- to be incrementally negative.

As frustrating as it is for those who were meaningfully short, it seems to me like at some point in the next 60-90-120 days at the most, there will be a most superb short entry point.  Perhaps that point is right now.  I imagine that the opportunity may be (almost?) as good in the last week of December, ahead of the Q4 delivery report which usually drops right at the beginning of January.  Not that I expect a shortfall -- Tesla will hit at least 105,000 units sold, almost guaranteed -- but because all of that is now 100% discounted and beyond.  The competition that hits in Europe starting January 1 will be devastating to Tesla's margins there.

And always remember that most basic of Tesla rules:  Barring a rare mistake, Tesla will *always* deliver the units.  They will simply lower the price to hit the unit delivery number.  They may fall behind temporarily from time to time, but the response will always be to drop the prices.  It's happened dozens of times already, and will happen almost every few weeks going forward for as far as this company remains in business.

Ford Q3 revenue down 2%.  Daimler Q3 revenue up 8%.  Tesla revenue down 6%.  Tesla gross margin down 22%.  Tesla net profit down 54%.

This smells a lot like the psychology exactly one year ago: This time it's different.  It wasn't.

2) This mark-up highlights what makes the least sense of everything: a 15% sequential and 16% YOY decline in operating expenses (see discussion of possible explanations below):

CGS improvement

3) A reader’s comment:

Just a heads up on inventory - trade in and off lease cars they haven’t wholesaled are included in that number. I have heard the auction cars aren’t selling for reserve price, so Tesla may be holding on to them to artificially keep the residual value up (which keeps the lease cost down). I’ve also heard, from someone I trust, that the 10% tariff waiver in China this quarter led to an influx of orders which may explain some of that increase. The X and S cost a lot more to produce than the 3 and are probably in inventory on a boat in the Pacific.

I’m still working through everything, but what is clear as they found a way to get massive cost concessions from suppliers this quarter. No idea how, and I’m not sure it is sustainable.

4) A smart Twitter post that highlights evidence of Tesla getting one-time supplier concessions (which it of course doesn’t disclose, other than to make vague reference to “non-recurring items”: https://twitter.com/orthereaboot/status/1187354099798425601

5) A reader’s comment:

Chin up, Whitney!

I'm a former shorter (and probably a future shorter) in Tesla. As I wrote on Stockopedia.com today:

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The best reason to be short a stock is that you know of a catalyst which is going to destroy the value of the equity.

And the best catalyst for a short is that the company is about to run out of money.

The primary reason for my shorting of Tesla was my suspicion that it was going to run out of funds, and that it might not be allowed to raise more (because of the antics of Elon Musk and the litigation which surrounds both him and Tesla).

It turns out that I was right about the company running out of funds, but my suspicions that it would have difficulty raising funds turned out to be wrong.

Tesla was allowed to raise a combination of convertible debt and equity in May, thereby putting my primary rationale for the short in doubt.

I will continue to watch it closely, as I do think that the company's long-term financial success is highly speculative, and that its corporate governance is questionable. Cutting its way to profitability has worked this quarter, but there is a limit to how far cutting expenses can take you.

Long-term success for Tesla will require strong margins to persist even in the face of direct competition from other auto manufacturers, and justifying the current valuation will require successful expansion in China and Europe.

This quarterly performance was boosted by Tesla filling its order backlog of expensive Model 3 variants in the UK and taking advantage of short-term tax incentives in the Netherlands. These are just two of the rabbits which Musk pulled out of the hat and I congratulate him.

But Tesla shares are still down 10% year-to-date, despite the rally which has taken place overnight. And justifying this market cap is going to be one hell of a mission.

6) A reader’s comment:

I don’t know if you noticed last week, but Tesla suddenly changed their delivery time for a new model 3 from 2 weeks (which it has been for the past 5 months) to 6-10 weeks. As you know my wife bought a model 3 four months ago, and I just ordered one because of the change in delivery time.

If didn’t order it this week so I can take delivery this year, I might not qualify for either the federal tax credit or state tax credit ($3000 in Maryland). Deliveries next year will probably not qualify for either tax credit, unless congress re-ups the credit which seems unlikely, same with Maryland credit.

The reason the company gave is very strong demand in Europe, who knows? But it does seem like a good tactic to load orders and sales into the 4th quarter.



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