Stanphyl Capital on issues Elon Musk faces ranging from competition facing Tesla Inc. (NASDAQ:TSLA) from electric SUVs to accounting issues. Excerpted from the hedge fund’s April letter to investors.
We remain short 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:
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.
In 2020 Tesla will again lose money, as it has every year in its 17-year existence.
Tesla is now a “busted growth story”; revenue growth is flatlining while unit demand for its cars is only being maintained via price cutting.
I begin the “Tesla section” of this month’s letter with one of the funniest (Musk is apparently uninsurable!) and most conflicted things I’ve ever seen in a large-cap public company filing, excerpted from this week’s amended 10-K:
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In April Tesla reported $16M in Q1 earnings thanks entirely to the sale of $354M in 100% margin regulatory credits that disappear after next year when other automakers no longer need to buy them as they’ll have enough EVs of their own.Additionally, Tesla’s earnings are typically inflated by around $200M/quarter from its ongoing warranty fraud (here’s an excellent Seeking Alpha article and another one in Fortune explaining some of this), so adjusted for these two factors the company would have lost over $500M in Q1, while free cash flow was minus $895M. This is not a viable business. Additionally, Tesla pulled all guidance for the rest of the year, and for good reason as Q2 (with sales dead and the U.S. factory closed for two months due to the coronavirus) will be a lot worse. And as @TeslaCharts pointed out on Twitter, Tesla is no longer a growth company:
(One caveat is that in Q2 Musk may try to recognize part of $600 million in 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], thereby turning a money-losing quarter into one showing paper profits. Meanwhile, God only knows how many more people this monstrosity unleashed on public roads will kill, despite February’s NTSB hearing condemning it as dangerous.)
Meanwhile Twitter user @TeslaCharts published a graphic that concisely destroys the latest fallacious Tesla bull arguments as encapsulated by an April research report from Goldman Sachs, which has made tens of millions of dollars raising money for the company and undoubtedly hopes to make tens of millions more:
Tesla’s rapidly eroding market share in Norway is particularly relevant, as it previews what the company will soon face worldwide, as Norway is the world’s most mature EV market with the most competitors. As Twitter user @EconomicManBlog points out, “COVID-19 is the best thing that could have happened to Tesla. This is the year that the “hyper growth” bubble was going to burst but now Tesla can blame the virus; this is why “market share” is so relevant—it’s unaffected by the virus.” Courtesy of Twitter user @fly4dat, look at how poorly Tesla is now doing there even before new competitors from VW, Audi, BMW, Daimler and Volvo/Polestar begin arriving this summer:
For those of you looking for a resumption of growth from Tesla’s upcoming Model Y, demand for that car is reportedly disastrous. This is unsurprising, as it will both massively cannibalize sales of the Model 3 sedan and (later this year and in 2021) face superior competition from the much nicer electric Audi Q4 e-tron, BMW iX3 (in Europe & China), Mercedes EQB, Volvo XC40 and Volkswagen ID.4, 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 will have terrific direct “sedan competition” later this year 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 even without the coronavirus problem: prior to a recent 10% sales tax exemption Tesla was selling around 30,000 Model 3s a year there, and “the story” is that avoiding the 15% tariff and that 10% sales tax will allow it to sell a lot more. There’s also a $3600 EV incentive available (which will be reduced over the next two years), but China just cut to 300,000 yuan the maximum price allowed for an EV to get it; Tesla is thus slashing its Model 3 price from 323,000 yuan to qualify and will now make little-to-nothing on the car,and thus all volume increases will be profitless. Meanwhile the rule of thumb for the elasticity of auto pricing is that every 1% price cut results in a sales increase of up to 2.4%. If we assume a 2.4x “elasticity multiplier,” domestically produced Model 3s that are 40% cheaper (than the original price at the 30,000/year sales rate) would result in annual sales of just 59,000 (40% x 2.4 = 96% more than the previous 30,000), meaning Tesla’s new Chinese factory would be a massive money-loser vs. its initial 150,000-unit annual capacity and the 500,000/year capacity it will supposedly have in 2021. Even if we were to increase the previous sales rate by 150% to 75,000 cars a year, it would be massively disappointing for Tesla bulls and the factory will be a huge money-loser.
Meanwhile, sales of Tesla’s highest-margin cars (the Models S&X) will be down by over 50% worldwide this year vs. their 2018 peak, thanks to cannibalization from the less expensive Model 3 and direct high-end competition (especially in Europe and China) from the Audi e-tron, Jaguar I-Pace, Mercedes EQC and 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.)
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). And in January Aaron Greenspan of @PlainSite published a terrific treatise on the long history of Tesla fraud; please read it!
So in summary, Tesla is about to face a huge onslaught of competition with a market cap approximately double that of Ford, GM and Fiat Chrysler combined, despite selling a bit over 400,000 cars a year while Ford, GM and Fiat-Chrysler sell 5.4 million, 7.7 million and 4.4 million vehicles respectively. Thus, this cash-burning Musk vanity project is worth vastly less than its $145 billion market cap and—thanks to nearly $30 billion in debt, purchase and lease obligations—may eventually be worth “zero.”