Mark Spiegel’s Stanphyl Capital is famous for its questioning of Tesla but its biggest alpha comes from his picks in small caps – see below for an excerpt on Tesla Inc (TSLA) from their August 2017 letter. But first… although he is known as Elon Musk’s number one enemy, Mr. Spiegel makes most of his money from killer small cap picks. His under the radar small caps which could pop just based on this piece (if we discussed it publicly) were profiled in ValueWalk’s 2nd edition of our quarterly premium newsletter. Below is an excerpt on Tesla short thesis and the role of electric cars in china in that regard.
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As noted in previous letters, this year’s terrible performance has been primarily due to our short position in Tesla, whereby despite having an overwhelming number of facts on our side (detailed, as usual, below) the stock is up 67% this year.
And then of course we’re short Tesla, which I still consider to be the biggest single stock bubble in this whole bubble market—a company so landmine-filled that I think it can implode at any moment regardless of what the broad market does.
A number of smart people have reached out to me to express their belief that Tesla is among the most obvious shorts they’ve ever seen (yes, I know—“crowdedness” on the short side is temporarily propping it up) and that I’ve thus been writing about it to the point of overkill. There may be something to that, and thus going forward I’ll somewhat reduce the amount of space I allocate to the company in this letter, focusing just on a few key developments in the current month followed by updated links to its massive competition. I shall also always reiterate the following three core points:
1) Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
2) Tesla loses a huge (and increasing) amount of money despite relatively light competition but will soon be confronted with massive competition is every aspect of its business.
3) Elon Musk is extremely untrustworthy.
In August Tesla released a disastrous Q2 2017 earnings report with record cash burn and—excluding the one-time injection of Zero Emission Vehicle credit revenue—a record loss. Rather than rehashing how bad things were, you can read this perfect summary of the quarter from Zero Hedge supplemented by this one from Seeking Alpha as well as this one showing what a disaster the battery storage division remains. Meanwhile, the Model 3 will be a huge sales disappointment when reservation holders realize that fewer than 100,000 of them will qualify for the $7500 tax credit and almost nothing can be done in the car without a multi-step process on the touchscreen-- not even changing the windshield-wiper speed, adjusting the air vents or opening the glovebox! In other words, in some circumstances operating a Tesla Model 3 may be as dangerous as texting while driving! And of course Tesla will make little (if any) money on the car, as it currently loses a fortune on models starting at twice the price.
Importantly in late August, the Wall Street Journal published a terrific exposé of something I’ve written about in these letters for a very long time: Tesla’s dangerous and deceptive deployment of its so-called “Autopilot.” Upon this article’s publication I considerably re-upsized our short position (with a fairly tight stop!) as Tesla—due to its awfulfundamentals—survives only on Musk’s reputation among his Kool-Aid drinking acolytes, and the feedback I’m now seeing in multiple forums (both in reaction to that story and a number of other deceptive practices from the company) is that those cult members (and their lazy media enablers) are finally starting to regurgitate some of that Kool-Aid.
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its fully diluted market cap now exceeds those of Ford and GM despite a billion-dollar annualized operating loss selling just 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $70 billion fully-diluted enterprise value and—thanks to its roughly $10 billion in debt—may eventually be worth “zero.”