Excerpted from Stanphyl Capital’s October letter to investors on the section focusing on the hedge fund’s Tesla Inc. (NASDAQ:TSLA) short.
See more exclusive hedge fund shorts (and longs) here.
And now for the primary cause of this month’s awful performance, Tesla Inc (NASDAQ:TSLA)…
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
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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:
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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.
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By mid-to-late 2020 Tesla (which has an awful balance sheet) will return to losing money.
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Tesla is now a “busted growth story”; unit demand for its cars is only being maintained via continual price reductions and expiring tax incentives.
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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.
Meanwhile, the Model 3 sedan will have terrific direct “sedan competition” in 2020 from Volvo’s beautiful new Polestar 2, 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, 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)…
Porsche Macan EV to get Taycan platform and tech Audi e-tron: Electric Has Gone Audi
Audi e-tron Sportback comes early 2020
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 Mercedes to launch more than 10 all-electric models by 2022
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 Chevrolet Bolt Now Offers 259 Miles of Range
GM is transforming Cadillac into an electric brand Ford, GM rev up electric pickup trucks to head off Tesla
Ford performance EV crossover comes 2020, electric F-150 2021, 2 midsize EV crossovers 2022 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
New BMW i4: fresh shots reveal electric saloon’s design
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
Daimler & BYD launch new DENZA electric vehicle for the Chinese market Denza Concept X Debuts; On Sale Early 2020
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 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
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
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 Hozon
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
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
NEC
Toshiba
ABB
Saft
EnerSys
SOLARWATT
Sonnen
Kyocera
Kokam
NantEnergy
Eaton
Nissan
Tesvolt
Kreisel
Leclanche
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 over $50 billion enterprise value and—thanks to over $30 billion in debt, purchase and lease obligations—may eventually be worth “zero.”
