Whitney Tilson’s email to investors discussing the Tesla Inc (NASDAQ:TSLA) Model 3 boom is decelerating in Europe; Galileo Russell’s bull case; a response.
1) More bad news from Europe: Latest JATO data shows that the Tesla Model 3 boom is decelerating. Excerpt:
Q1 hedge fund letters, conference, scoops etc
According to the latest preliminary data collected by JATO, the Tesla Model 3’s initial success has begun to slowdown. After the strong results achieved in February and March, when the car led the electric rankings and the premium midsize segment rankings, the Model 3’s registrations fell dramatically in April. The final results will be published next week, but it is likely that the volume will not be as high as in March.
In April, the Tesla Model 3 was replaced by the Renault Zoe as the best-selling pure electric car in Europe. The French subcompact recorded approximately 4,000 registrations in 27 European markets, up by 62%, as it was boosted by strong demand in France, Germany and Italy. The Tesla Model 3 was 350 units behind, with Norway, Germany and the Netherlands making up its top three markets.
2) Here’s Galileo Russell with his latest bull case on Tesla:
3) A friend’s response to young Galileo, who is making every rookie mistake imaginable…
This video does not really break any new ground in the Tesla investment argument, or advance the case from what we have been hearing for a while now.
At the core of the flaw in the argument is this background: Tesla skyrocketed in valuation from April 2013 to August 2014, basically going from something like $37 to $270. Even with the lower share count of 2014 compared to today, it was already at a valuation that was decimal points ahead of other automakers.
Basically, already in 2013-2014, Tesla’s valuation had come to reflect an insane amount of growth -- and based on the analyst models at the time (including management’s guidance) -- also huge profitability certainly by 2015. By 2018, the profits were going to be $20 to $45 per share, per year.
All of these impressive metrics basically amounting to “Impressive Tesla sold a lot of cars by the end of 2018” are really only the first of the building blocks it was going to take to grow into the valuation the company achieved by 2013-14. Of course, Tesla never got to the most important one: Sustained profits of sufficient degree, in combination with a sound balance sheet.
Tesla’s fortunes are now divided into three major geographies: North America, Europe and China. We already know the outcome in Europe: Tesla has run into major headwinds and peaked in the month of March 2019. Things are now on their way down in Europe. In North America, things are better, and Q2 should see an uptick from the very low Q1 number -- but still nowhere near Q4 2018. And that’s despite by ever-desperate discounting.
China is perhaps the biggest swing factor of all. On the one hand, in some sort of abstract sense, Tesla ought to be able to sell a decent amount of cars there. So far, sales have been relatively miserable -- especially if we count retail sales as opposed to units that have been imported.
But that may not be Tesla’s biggest problem. China could at any point argue that Tesla is simply a rolling sensor probe into China’s society -- collecting all sorts of information from cameras, radars and microphones, among other things. Tesla’s CEO is, after all, tight with NASA, which is part of the U.S. military-industrial complex. Does China want the U.S. military-industrial complex to have tens of thousands of probes rolling around its country, practically spying on China’s military facilities and staff? We shall see... A Tesla can listen to what’s been said inside the car, and perhaps also what’s surrounding the car. It’s like an Amazon Alexa on steroids -- at least potentially. How would China really know? Don’t be surprised to see China to simply ban Tesla from operating in any form on Chinese soil. After all, how is Tesla different from Huawei in its potential information-gathering capabilities?
In any case, Galileo appears not to understand how markets work. In his video, he says that he estimates that Tesla will sell only 330,000 cars this year. That’s below management’s guidance of 360,000 to 400,000. Before we even get into the most fundamental issue of profitability, we can kind of rest our case there, can’t we? He has just said that management has no credibility, because the company will fall well short of its guidance this year.
The reality is that Galileo doesn’t get to double-dip on his valuation thesis. The company became insanely overvalued in 2013-2014, as its stock rose by almost 10x. If the company now is growing impressively in terms of its top line, that is not incremental credit on top of where the company had run in 2013-2014 -- especially since the company has fallen short of all profitability targets since then, and has been loaded up with debt as well.
As for the car itself and its competition, here is the big picture: It’s not about any one single “Tesla killer.” It’s about the cumulative impact on margins, from automakers selling a very long list of cars below cost.
Think of Tesla as a wildebeest. It is initially attacked by one hyena. It can easily repel it by kicking it in the head very hard. Perhaps a second or even a third one as well. In this case, however, we have well over 100 hyenas in line to attack. Tesla is going up against literally well over 100 competitors who will be selling below cost -- because they have to due to mandates to sell more EVs than people are willing to buy at profitable prices.
At that point, it wouldn’t even matter if Tesla by some standard were objectively “the best car.” It would still be “profitless prosperity” of getting some market share in a market where nobody makes any money.
Tesla makes an interesting car alright. It’s different.Some people like it. That’s not the same as a company generating the kind of return it will take to justify a higher valuation than where Tesla has been trading recently.
