Low level of temporary Tesla profitability ahead of collapse: Short seller

Stanphyl Capital’s letter to investors for the month of November, 2019, discussing the temporary Tesla profitability.

Tesla profitability

dominickvietor / Pixabay

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)…

Porsche Taycan

Porsche Taycan Cross Turismo

Porsche Macan EV to get Taycan platform and tech

Audi e-tron: Electric Has Gone Audi
2020 Audi E-Tron Sportback debuts slick new roofline, a bit more range

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

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

Audi e-tron compact hatch to lead brand’s electrification plans

Audi TT set to morph into all-electric crossover

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 EQV Electric Minivan Revealed – Available Early 2020

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

Mercedes EQS will be built in addition to the S-Class on a new dedicated electric platform

Volvo Polestar 2 Arrives early 2020

Volvo XC40 Recharge, a 408-HP Electric SUV comes in 2020

Volvo XC-90 EV coming in 2022

Volkswagen unveils the ID.3, its first ‘electric car for the masses’

VW's EV crossover for U.S. will be called ID4

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

All-Electric Ford Mustang Mach-E Delivers Power, Style and Freedom for New Generation

Ford, GM rev up electric pickup trucks to head off Tesla

Chevrolet Bolt Now Offers 259 Miles of Range

GM's Detroit-Hamtramck plant expected to build electric Escalade, Sierra
GM is transforming Cadillac into an electric brand

Ford to build two European EVs based on VW’s MEB platform

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

Nissan Ariya Electric SUV Concept Is Destined for Production

BMW 1 Series Electric Coming As Early As 2021

BMW iX3 electric crossover goes on sale in 2020

2021 BMW i4 details revealed: 80-kWh battery, 530 hp, 373-mile range

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

Peugeot 208 to electrify Europe's small-car market

Peugeot to offer EV version of new 2008 small crossover

Electric Mini Arrives 2020

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

Mazda extends MX name to new MX-30 electric crossover

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

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

Maserati to launch electric sports car

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

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

Former Saab factory gets new life building solar-powered Sono Sion electric cars

And in China...

VW ramps up China electric car factories, taking aim at Tesla

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

JAC-Volkswagen Launch SOL E20X, The 1st EV from the Joint Venture

Audi Q2L e-tron debuts at Auto Shanghai

Audi will build Q4 e-tron in China

FAW-Volkswagen’s Foshan plant said to produce e-tron Sportback

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

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

China’s BYD launches six new electrified vehicles

Top of Form

Bottom of Form

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

Mercedes styled Denza X 7-seat electric SUV to hit market

BAIC Goes Electric, & Establishes Itself as a Force in China’s New Energy Vehicle Future

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, Great Wall to build new China plant for electric cars

Toyota, BYD will jointly develop electric vehicles for China

GAC Toyota to make all-electric C-HR

GAC Aion

GAC unveils new NEV offshoot dubbed HYCAN

Chevrolet's new China-only EV is called the Menlo and it looks good

Buick Rolls Out First Electric Car for China

General Motors’ Chinese Venture to Sink $4.3 Billion Into Electric Vehicles by 2024

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

Dongfeng Peugeot said to roll out three NEV models in first-half 2020

Hyundai Motor Transforming Chongqing Factory into Electric Vehicle Plant

Nio

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

Renault reveals series urban e-SUV K-ZE for China

Renault & Brilliance detail electric van lineup for China

Renault forms China electric vehicle venture with JMCG

Honda Debuts New Everus VE-1 All-Electric SUV, But Only For China

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

Geely launches new electric car brand 'Geometry' – will launch 10 EVs by 2025

Mazda to roll out China-only electric vehicles by 2020

Xpeng Motors sells multiple EV models

Changan New Energy

WM Motors/Weltmeister

Chery

Seres

Byton

Enovate

China's cute Ora R1 electric hatch offers a huge range for less than US$9,000

Singulato

JAC Motors releases new product planning, including many NEVs

Seat to make purely electric cars with JAC VW in China

Iconiq Motors

EV maker Bordrin skips flash, keeps real-car focus

Aiways

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

Youxia

CHJ Automotive begins to accept orders of Leading Ideal ONE

Infiniti to launch Chinese-built EV in 2022

Zotye Auto to roll out 10 plus NEV models by 2020

Thunder Power

Leapmotor

Continental, Didi sign deal on developing EVs for China

Mine Mobility (Thailand)

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

Aptiv and Hyundai Motor Group Form Autonomous Driving Joint Venture

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

Hyundai to start autonomous ride-sharing service in Calif.

Uber unveils next-generation Volvo self-driving car

Baidu kicks off trial operation of Apollo robotaxi in Changsha

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

FAW Hongqi readies electric SUV offering Level 4 autonomous driving

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

Pony.ai, GAC Group launches Aion LX’s level 4 self-driving version

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

Mitsubishi Electric to Exhibit Autonomous-driving Technologies in New xAUTO Test Vehicle

Apple acquires self-driving startup Drive.ai

Momenta – Building Autonomous Driving Brains

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 where Tesla’s competition will get its battery cells...

Panasonic (making deals with multiple automakers)

LG

Samsung

SK Innovation

Toshiba

CATL

BYD

Northvolt (backed by VW & BMW)

Farasis

Akasol

Cenat

Wanxiang

Svolt

Romeo Power

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

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

BMW invests in Solid Power solid-state batteries

Ford invests in Solid Power solid-state batteries

Hyundai Motor developing solid-state EV 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

GM inaugurates battery assembly plant in Shanghai

PSA to assemble batteries for hybrid, electric cars in Slovakia

Honda Partners on General Motors' Next Gen Battery Development

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

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

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

Here’s Tesla’s competition in charging networks...

Electrify America is spending $2 billion building a high-speed U.S. charging network

EVgo is building a U.S. charging network

191 U.S. Porsche dealers are installing 350kw chargers

ChargePoint to equip Daimler dealers with electric car chargers

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

Ionity has over 150 European 350kw charging stations

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

Allego has hundreds of chargers in Europe

PodPoint UK charging stations

BP Chargemaster/Polar is building stations across the UK

Instavolt is rolling out a UK charging network

Fastned building 150kw-350kw chargers in Europe

Deutsche Telekom launches installation of charging network for e-cars

Shell starts rollout of ultrafast electric car chargers in Europe

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

Evie rolls out ultrafast charging network in Australia

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

Ambri

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 knew SolarCity faced a ‘liquidity crisis’ at time of 2016 deal, legal documents show

Musk’s empire was in peril in 2016, and new documents reveal the desperate plan to save it

Elon Musk knew SolarCity was going broke before merger with Tesla

Elon Musk Settles SEC Fraud Charges

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

More Broken Promises From Tesla

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 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.”



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