Tesla Motors (TSLA): The Short Case Is Far More Than Valuation

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Tesla Motors stock continues to be the focus of much debate, and today we’ve heard about another hedge fund that’s shorting the EV manufacturer. Mark Spiegel of Stanphyl Capital explained in a recent letter to investors why he’s short Tesla. The letter was shared with ValueWalk and is embedded below in its entirety. The firm follows a long-short equity strategy. The hedge fund started investing in June 2011 and boasts a return of 76.2% since its inception, outperforming the S&P 500’s 70.3% gain over the same time frame.

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Shares of Tesla started climbing in early trades this morning and were up 2.21% at $235.35 per share and still rising as of this writing, possibly because of a positive report from Goldman Sachs.

Why short Tesla?

Spiegel said in his letter to investors that Stanphyl was down for November by about 2.5%, net of fees and expenses, underperforming the S&P 500's increase of about 0.3% during the month. He said their short of Tesla Motors was mostly to blame for that decline.

You can read the full letter below, but to make a long story short, he is adamant that Tesla stock will decline based on numerous fundamental metrics. You'll see a smorgasbord of links in his letter which explain why he thinks the automaker doesn't actually have the proprietary technology much of the market thinks it has. Really it's quite impressive the number of links he has backing up his thesis in this area and several others.


He sees competition as a huge risk and accuses Tesla management of a long string of deceptions. He notes that most of the automaker's original C-level executives have left and that regulatory filings indicate a high level of insider selling of Tesla stock. He says the EV manufacturer is on track to run out of cash sometime next year despite recent fundraising efforts and expects yet another one in the near future. And finally, he thinks the Model X is overpriced, a theme we've heard multiple times before.

So check out Spiegel's full letter below. It's an excellent read.

In a seemingly shocking move, in November we got long Elon. No, not Elon MUSK—we’re still very short him. Instead we bought Echelon Corp. (Ticker: ELON; basis: $0.628; November close: $0.637). This is an “industrial internet of things” networking company (now primarily focused on “smart” commercial LED lighting) that has been in a long decline, with a slowly eroding fab-less chip business and a stock price down roughly 98% (!) from its 2007 peak. We bought this $40 million revenue, 56% gross margin company for almost nothing, as its roughly $25 million in net cash is only a couple of million dollars below its market cap. The catch of course is that it’s burning that cash-- currently at a rate of around $4 million a year-- but with extensive restructuring and extremely fast growth in its nascent LED networking business, it looks as if it’s on a path to being cash-flow break in perhaps two years. If it gets there on $48 million of revenue with $19 million of remaining cash, at a strategic acquisition price of 1.5x revenue plus a reasonable value for its nearly $240 million of NOLs it would be worth over $2/share. If it doesn’t get there but cuts the burn enough to be profitable for a strategic acquirer (say, down to $1 million a year but with an additional $4 million of potential cost eliminations), it should still be worth around $1/share, as I think there would be some buyer out there who would pay 0.5x-0.75x revenue plus the remaining cash plus something for the NOLs for a $40 million/year, high gross margin business. I know there are some big “ifs” behind these numbers but considering that the cash in the bank gives the company at least six years to get to break-even, I think it’s an interesting proposition. (The stock is reverse-splitting 1:10 in December, so if you happen to punch up a quote mid-month don’t get too excited—we will not have made a 1000% return in just 30 days!)

As noted above, we remain short Tesla Motors (ticker: TSLA; November close: $230.26) which in November reported yet another disastrous quarter (Q3), with a record-setting $595 million of negative free cash flow and-- based upon ongoing costs vs. the amount set-aside for newly sold cars-- what looks like a severely inadequate reserve for future warranty expense. (In October Consumer Reports finally acknowledged Tesla’s widely known reliability problems, and it isn’t just Consumer Reports that noticed.) The big picture issues for Tesla are twofold (note: many of these links are newly updated): 1) The market is under the mistaken impression that it has significant & sustainable proprietary technology when it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in batteries (where even its sole supplier Panasonic is going into direct competition with it both at utility scale and in the home); it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t , doesn’t and doesn’t in cars (in fact even Mercedes is ending its Tesla relationship and will build its own direct competitor) and LG can now offer a complete turnkey electric drivetrain to any manufacturer who wants one; it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in autonomous driving (for example the new Mercedes E- Class—out this spring— has 23 sensors for autonomous driving vs. just 14 for Tesla and the CEO of Mobileye—Tesla’s autonomous driving technology supplier— recently said the hardware on the current Model S is inadequate for true autonomy while even the new $30,000 50+ mpg Prius has auto-pilot and self-parking); and it doesn’t and doesn’t in charging (Tesla has spent only around $175 million on its much-touted Supercharger network, a rounding error for the upcoming charging consortiums of big auto makers), and 2) The company’s management tells deception after deception after deception after deception after deception after deception after deception. Meanwhile, Tesla cars are now selling so well that the company is paying referral incentives and recently created a new low-margin “stripper” model.

In June Tesla’s CFO "retired" at age 52 and dumped nearly all his stock (they finally found a successor for him in November) while the VP of Sales & Service was also just replaced (with the previous one dumping his stock on the way out) and the (so far not leaving) VP of Manufacturing has sold almost everything.

Even the Chief Technology Officer-- the only remaining original C-level exec (besides Musk)-- is steadily dumping, as is Musk’s own brother, Fredo (sorry, I mean Kimbal). And despite encumbering nearly all its assets with a senior credit line and then doing an August follow-on stock offering, Tesla is on schedule to be out of cash by some time in 2016, thus making yet another near-term major capital raise inevitable.

Meanwhile, in November Tesla finally revealed the pricing for its long-delayed Model X crossover/SUV, and its $5000-$7000 premium to a comparable Model S sedan will be a huge sales-limiting factor, as nearly all of the luxury competition prices its premium SUVs considerably lower than its premium sedans. (The most basic “X” with no options and only 220 miles of range starts at $81,000 with only five seats standard; by comparison, a seven-seat Mercedes GL starts at $67,000.) TSLA is worth vastly less than its current roughly $36 billion fully diluted enterprise value and—thanks to over $3 billion of debt plus its credit line—may eventually be worth “zero.” Meanwhile, here’s one chart that tells you all you need to know about this taxpayer-subsidized, Musk vanity project of a company:


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