Excerpted from Stanphyl Capital’s October letter to investors on the section focusing on the hedge fund’s Tesla Inc. (NASDAQ:TSLA) short.
And now for the primary cause of this month’s awful performance, Tesla Inc (NASDAQ:TSLA)…
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Tesla reported Q3 earnings in October and—exactly as we expected—revenue for this alleged “growth company” was hundreds of millions of dollars lower than the year-ago quarter (U.S. revenue was down 39%!) also down vs. the previous quarter, yet sequential profitability unexpectedly flipped from a $408 million GAAP loss in Q2 2019 to a $153 million Q3 profit (vs. our expectation of a $300 million loss).
Car manufacturers don’t do this without a massive number of one-time items/tricks and this is not indicative of sustainable performance. Remember: between Q3 and Q4 of last year Tesla averaged even higher profitability, then slid back into massive losses. (And even if this were indicative of future profitability, car manufacturers sell for around 8x earnings; annualizing this .80/share to $3.20 would make Tesla [now just another slow/no-growth automaker] worth just $25.60/share even before considering its awful balance sheet.)
As to the specific financial games played in Q3, of the $143 million “profit,” $80 million came from foreign exchange gains, approximately $55 million from reduced warranty provisioning/accruals, $100 million reportedly from one-time rebates from suppliers promised future volume for Model 3 parts used on the
Stanphyl Capital GP, LLC
Stanphyl Capital Partners LP
Model Y, and $51 million from “burning the furniture to heat the house” via a huge reduction in SG&A despite having 97,000 more cars on the road, thereby resulting in interminable, reputation-destroying customer service wait times. , $134 million of the “profit” came from regulatory credit sales that will disappear approximately two years from now when they’re no longer needed by other auto manufacturers; i.e., they don’t merit an earnings multiple. Accounting for these non-repeatable (or unsustainable) items, Tesla’s alleged profit flips to a large loss, and these are only the one-time items of which we’re aware.
Tesla also claimed $371 million in Q3 free cash flow, but net payables minus receivables were up $365 million (in a quarter in which Tesla claimed expenses DECLINED across the board!) vs. an inventory gain of just $199 million, and capex was underspent by $225 million vs. the midpoint of guidance. Adjusted for these items free cash flow too was negative, and going forward capex must soar for Tesla to fulfill its obligations in China (where it must spend an additional $1.5 billion within the next 20 months) and to purchase Model Y tooling.
In fact we may see a similar low level of temporary Tesla profitability in Q4 (the one we’re in now) or
Q1 of 2020, when in one or (divided between) both of those quarters Tesla recognizes approximately $500 million of non-cash (it’s already on the balance sheet) deferred revenue from its fraudulently named “Full Self-Driving” (the capabilities of which offer nothing of the kind). By rolling out various useless and dangerous features of this homicidal software suite, may claim that prior buyers of this nonsense received what they paid for, and will thus run those non-cash profits through its financial statement, thereby again perhaps providing this money-losing company with a fleeting moment of minor profitability. As with Q3, these will be non-repeatable one-time gains (or, if you prefer, “games”), and later in 2020 the losses will resume.
We thus remain short stock and call options in Tesla, which I still 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 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, as well as the ability to subsidize losses on electric cars with profits from their conventional cars.
By mid-to-late 2020 Tesla (which has an awful balance sheet) will return to losing money.
Tesla is now a “busted growth story”; unit demand for its cars is only being maintained via continual price reductions and expiring tax incentives.
Elon Musk is a securities fraud-committing pathological liar.
As noted earlier, Q3 2019 U.S. Tesla revenue was down 39% (!) vs. Q3 2018 and the company is only showing unit delivery growth (with declining revenue) by slashing prices and fulfilling Model 3 backlog in countries where deliveries just began (most notably the UK in Q3 and South Korea in Q4), and where EV
incentives are about to expire (the Netherlands until year-end). In other words, the Tesla “hypergrowth” story is over.
For those of you looking for a resumption of growth from Tesla’s upcoming Model Y, when it’s available in Q2 2020 it will both massively cannibalize sales of the Model 3 sedan and (by late 2020) face superior competition from the much nicer electric Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 and Volkswagen ID Crozz, 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.
And if you think China is the secret to the resumption of Tesla’s growth, let’s put that market in perspective: Tesla currently sells around 30,000 Model 3s a year there and “the story” is that avoiding the 15% tariff and 10% VAT will allow it to sell a lot more. However, 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 assume a 2.4x “elasticity multiplier,” domestically produced Model 3s that are 25% cheaper would result in annual sales of 48,000 Model 3s (25% x 2.4 = 60% more than the current 30,000), meaning Tesla’s new Chinese factory would be a massive money-loser as it would be running at less than 1/3 of its initial 150,000-unit annual capacity. Perhaps realizing this, Tesla is initially mandating the purchase of Autopilot, and thus Chinese-made Model 3 will only be slightly cheaper than previous versions. Although that will substantially improve per-car profitability and perhaps make the factory marginally profitable, it will guarantee hugely missed growth targets and it’s “growth” (or more accurately, the fantasy of growth) that drives Tesla’s stock price. And good luck with growing at any profitable price— here’s a great overview of what a dogfight the Chinese EV market has become.
Meanwhile, sales of Tesla’s highest-margin cars (the Models S&X) are down by over 30% worldwide this year, thanks to cannibalization from the Model 3 and the recently introduced Audi e-tron and Jaguar I- Pace, this sales drop is before this winter’s arrival of the Mercedes EQC and absolutely spectacular Porsche Taycan, 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.)
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 one proving blatant fraud by Musk in the SolarCity buyout (if you want to be really entertained, read his deposition!), a real beauty from Wal-Mart which was a victim of a secret Tesla cover-up of solar roof fires, an allegation that unsafe door handles caused a Tesla driver to burn to death in his car and evidence that the company secretly rolled back battery performance without compensating owners.
So here is Tesla’s competition in cars (note: these links are regularly updated)…
THE AWARD-WINNING ALL-ELECTRIC JAGUAR I-PACE Jaguar Land Rover readies electric XJ and Range Rover Mercedes EQC Electric SUV Available Late 2019
Mercedes EQS will be built in addition to the S-Class on a new dedicated electric platform Mercedes to launch more than 10 all-electric models by 2022
Kia Soul (available mid-2019) EV’s Range Jumps to 243 Miles
BMW’s 2021 iNEXT Returns In New Teasers Showing Prototypes Production Rivian electric pickup truck- funded by Amazon, Ford, Cox & others- is on the way Renault upgrades Zoe electric car as competition intensifies
Bentley Will Offer Hybrid Versions of Every Car It Makes and Add an EV by 2025 Lucid Motors closes $1 billion deal with Saudi Arabia to fund electric car production Meet the Canoo, a Subscription-Only EV Pod Coming in 2021
And in 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 Hyundai Motor Transforming Chongqing Factory into Electric Vehicle Plant Nio
WM Motors/Weltmeister Chery
Iconiq Motors Hozon
Here’s Tesla’s competition in autonomous 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
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
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 Hyundai to start autonomous ride-sharing service in Calif.
Geely selects Volvo, Veoneer joint venture as autonomous tech supplier BMW and Tencent to develop self-driving car technology together
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
Fujitsu and HERE to partner on advanced mobility services and autonomous driving Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology
Here’s where Tesla’s competition will get its battery cells…
Panasonic (making deals with multiple automakers) LG
SK Innovation Toshiba CATL
Northvolt (backed by VW & BMW) Farasis
Cenat Wanxiang Svolt
Most car makers will use those battery cells to manufacture their own packs. Here are some examples:
Here’s Tesla’s competition in charging networks…
GM and Bechtel plan to build thousands of electric car charging stations across the US Ford introduces 12,000 station charging network, teams with Amazon on home installation Volta is rolling out a free charging network
E.ON and Virta launch one of the largest intelligent EV charging networks in Europe Volkswagen plans 36,000 charging points for electric cars throughout Europe Smatric has over 400 charging points in Austria
Total to build 1,000 high-powered charging points at 300 European service-stations Volkswagen, FAW Group, JAC Motors, Star Charge formally announce new EV charging JV BP, Didi Jump on Electric-Vehicle Charging Bandwagon
And here’s Tesla’s competition in storage batteries…
electrIQ Power Belectric Stem
Renault Primus Power
Adara Blue Planet
Tabuchi Electric Aggreko Orison
Moixa Powin Energy Nidec Powervault Schmid
24M Ecoult Innolith
Energy Vault Ambri
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
So in summary, Tesla is about to face a huge onslaught of competition with a market cap larger than
Ford’s and GM’s despite selling fewer than 400,000 cars a year while Ford and GM make billions of dollars selling 6 million and over 8 million vehicles respectively. Thus this cash-burning Musk vanity project is worth vastly less than its over $50 billion enterprise value and—thanks to over $30 billion in debt, purchase and lease obligations—may eventually be worth “zero.”