Stanphyl Capital’s letter to investors for the month of November, 2019, discussing the temporary Tesla profitability.
We remain short stock and call options in Tesla Inc. (TSLA), 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:
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- 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 and its awful balance sheet will return to losing money.
- Tesla is now a “busted growth story”; revenue was roughly flat sequentially and declined year-over-year while 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.
Tesla reported Q3 earnings in October and revenue for this alleged “growth company” was hundreds of millions of dollars lower than the year-ago quarter (U.S. revenue was down 39%!) and also down vs. the previous quarter, yet sequential Tesla 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). In last month’s letter I laid out multiple reasons why Q3 would, in fact, have shown a multi-hundred-million-dollar loss without various accounting games and unsustainable expense cuts, and in November fund manager Jim Chanos laid out a concise case on Twitter why even if one accepts Tesla’s numbers its equity is worth “zero.”
We may also 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, Tesla will 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.
Meanwhile Tesla is only showing unit delivery growth (with declining revenue) by extensive 2019 price slashing 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, 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.
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, and this sales drop is before this winter’s arrival of the Mercedes EQC and absolutely spectacular 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.)
And oh, the joke of a “pickup truck” Tesla introduced in November won’t be any kind of “growth engine” either, especially as if it’s ever built it will enter a dogfight of a market.
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 23rd out of 30 brands and the number of lawsuits of all types against the company continues to escalate-- there are now over 800 including one proving blatant fraud by Musk in the SolarCity buyout (if you want to be really entertained, read his deposition!), 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)…
AUDI E-TRON GT FIRST DRIVE: LOOK OUT, TESLA (available 2020)
Mercedes EQC Electric SUV Available Late 2019
Mercedes EQV Electric Minivan Revealed – Available Early 2020
Kia Soul (available mid-2019) EV’s Range Jumps to 243 Miles
Ford, GM rev up electric pickup trucks to head off Tesla
BMW iX3 electric crossover goes on sale in 2020
Rivian electric pickup truck- funded by Amazon, Ford, Cox & others- is on the way
Meet the Canoo, a Subscription-Only EV Pod Coming in 2021
And in China...
VW ramps up China electric car factories, taking aim at Tesla
Daimler to Start EQC Electric SUV Production in China in 2019
Daimler and BMW to cooperate on affordable electric car in China
BMW, Great Wall to build new China plant for electric cars
Renault forms China electric vehicle venture with JMCG
Geely launches new electric car brand 'Geometry' – will launch 10 EVs by 2025
Mine Mobility (Thailand)
Here’s Tesla’s competition in autonomous driving...
Tesla has a self-driving strategy other companies abandoned years ago
Cadillac Super Cruise™ Sets the Standard for Hands-Free Highway Driving
VW taps Baidu's Apollo platform to develop self-driving cars in China
SoftBank, Toyota's self-driving car venture adds Mazda, Suzuki, Subaru Corp, Isuzu Daihatsu
Magna joins the BMW Group, Intel and Mobileye platform as an Integrator for AVs
BMW and Tencent to develop self-driving car technology together
Groupe PSA’s safe and intuitive autonomous car tested by the general public
Momenta – Building Autonomous Driving Brains
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)
Northvolt (backed by VW & BMW)
Toyota accelerates target for EV with solid-state battery to 2020
BMW invests in Solid Power solid-state batteries
Most car makers will use those battery cells to manufacture their own packs. Here are some examples:
Daimler starts building electric car batteries in Tuscaloosa – one of 8 battery factories
PSA to assemble batteries for hybrid, electric cars in Slovakia
Here’s Tesla’s competition in charging networks...
ChargePoint to equip Daimler dealers with electric car chargers
Allego has hundreds of chargers in Europe
And here’s Tesla’s competition in storage batteries...
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, June 2009: “Tesla will cross over into profitability next month”
How Tesla and Elon Musk Exaggerated Safety Claims About Autopilot and Cars
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 roughly $70 billion enterprise value and—thanks to over $30 billion in debt, purchase and lease obligations—may eventually be worth “zero.”