Tesla's Production Capacity Outstrips Incoming Orders

Stanphyl Capital’s commentary for the month ended December 31, 2022, discussing their short position in Tesla Inc (NASDAQ:TSLA).

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Inventory Pile Up

Despite running its new factories in the U.S. and Germany at only around 20% of capacity, massive amounts of excess Tesla inventory piled up in Q4, spurring huge, margin-slashing price cuts in China, Europe, the U.S. and Canada & Mexico, and even forcing the company’s China plant to slash December and January production.

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Tesla’s production capacity now hugely outstrips its rate of incoming orders, which undoubtedly explains why the company is implementing layoffs and a hiring freeze, and its used car prices are plunging too, further killing demand for new ones. Goodbye “story-stock tech company” and hello “cyclical car company” in an industry with single-digit PE ratios!

As Tesla slashes prices it will undoubtedly sell more cars (I expect Q4 deliveries to be slightly over 400,000 vs. previous quarters in the 300,000s, thanks to the aforementioned massive price cuts plus a rush to beat big year-end expiring EV incentives in China, Germany, France and Norway), but any other car company can slash prices and do the same thing.

And again, Tesla’s apparent market saturation rate of around 1.6 million cars/year worldwide (at least until it slashes prices yet again!) is massively below its current factories’ production capacity, much less the bulls’ absurd expectations of adding a new factory every six months for the next ten years in order to sell 20 million cars a year!

For some valuation perspective, BMW sells around 2.5 million cars a year with very high margins (including the best electric SUV now on the market (the new iX), the best luxury EV (the new i7), and among the best small luxury EVs (the new i4), and has a market cap of around $59 billion.

If Tesla grew annual deliveries to the size of BMW’s (50% higher than its current run-rate!) and had BMW-level margins, at BMW's current market cap it would sell for less than $19/share vs. this month's closing price in the $123s! (Remember: Tesla now has 3.16 billion shares outstanding!)

Meanwhile, Elon Musk remains the most vile person ever to head a large-cap U.S. public company, and we remain short Tesla, the biggest bubble-stock in modern market history, because:

It has a sliding share of the world’s EV market yet—even after its recent plunge—still has a market cap greater than those of Toyota, Volkswagen, Hyundai, GM and Ford combined (all of which now offer great EVs), despite stalling out at around 1.6 million annual deliveries vs. a combined 34 million for those other companies!
It has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of its electric car technology (which has now been equaled or surpassed by numerous competitors) and its previously proprietary Superchargers are being opened to everyone).
Excluding working capital benefits and sunsetting emission credit sales, Tesla generates only minimal earnings and free cash flow.
Elon Musk is a pathological liar who - through his recent “Twitter insanity” - has wrecked the already competition-diminished Tesla brand.

Expectations From Q4 Earnings

In January Tesla will likely announce Q4 deliveries of a bit over 400,000 cars, yet thanks to the massive amount of price-cutting necessary to sell those cars, its earnings (excluding unforeseen extraordinary items) will likely only slightly surpass its Q3 GAAP number of around .87/share excluding sunsetting emission credit sales.

And if—after viewing this chart from Twitter user @Keubiko—you believe that Q3 earnings number wasn’t grossly exaggerated, I have a bridge to sell you in Brooklyn:

Furthermore, Tesla’s minimal depreciation of its new factories appears fraudulently low, as does its warranty reserve.

Even if you believe Tesla’s clearly nonsensical reported earnings, excluding emission credit sales they annualize to only $3.48/share, which based on the current price of $123.18 = a run-rate PE ratio of around 35 for a now slow-growing, margin-slashing car company in an industry with a current average PE of around 5!

Meanwhile, Tesla has objectively lost its “product edge,” with many competing cars now offering comparable or better real-world range, better interiors, similar or faster charging speeds and much better quality. (Tesla ranks near the bottom of Consumer Reports’ reliability survey while British consumer organization Which? found it to be one of the least reliable cars in existence.)

Thus, due to competitors’ temporary production constraints, waiting times are now longer for nearly all of Tesla’s direct EV competitors than they are for a Tesla.

In fact, Tesla is likely now the second, third or fourth choice for many EV buyers, and only maintains its volume lead though a short-lived edge in production capacity that will disappear over the next 12 to 36 months as competitors rapidly increase the ability to produce their superior EVs.

Tesla’s poorly-built Model Y faces current (or imminent) competition from the much better made (and often just better) electric Hyundai Ioniq 5, Kia EV6, Ford Mustang Mach E, Cadillac Lyriq, Nissan Ariya, Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 Recharge, Chevrolet Blazer EV & $30,000 Equinox EV and Polestar 3.

And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2, the great new BMW i4, the upcoming Hyundai Ioniq 6 and Volkswagen Aero, and multiple local competitors in China.

And in the high-end electric car segment worldwide the Porsche Taycan (the base model of which is now considerably less expensive than Tesla’s Model S) outsells the Model S, while the spectacular new BMW i7, Mercedes EQS, Audi e-Tron GT and Lucid Air make it look like a fast Yugo, and the extremely well reviewed new BMW iX, Mercedes EQS SUV and Audi Q8 eTron (as well as multiple new Chinese models) do the same to the Model X.

Tesla Is Netflix

Indeed, for years I’ve said “Tesla is Blackberry”—the maker of a first-generation version of a product that—once the market was proven—would be supplanted into niche obscurity by newer, better versions; now I can provide a much more recent analogy: Tesla is Netflix.

For years Netflix had an absurd valuation based on its pioneering position in streaming media, but once it proved that such a market existed myriad competitors swarmed all over it, and in 2022 the stock collapsed when we learned that not only is Netflix no longer in “hypergrowth” mode but for the first time since 2011 (when it transitioned from physical DVDs) it actually lost subscribers.

I believe Musk knows that Tesla is “the next Netflix” (hence his recent “Twitter buying distraction”), with VW Group, Hyundai/Kia, Ford, GM, Stellantis, BMW, Mercedes, BYD & other Chinese competitors and, in a few years, Toyota & Honda, being the Disney, HBO Max, Amazon Prime, Peacock, Hulu, Paramount+, etc. of the electric car market, stealing Tesla’s share and eventually pounding its stock price into low double-digits, where it would be valued as “just another car company.”

Meanwhile, the NHTSA’s investigation of Tesla’s deadly Autopilot has expanded into “an engineering analysis,” the last required step before (finally!) demanding a full recall, and in October it was reported that this deadly scam is being investigated by both the SEC and the DOJ.

The refund liability potential for Tesla for this is in the billions of dollars, and possibly even the tens of billions if a class action lawsuit proves that the cars involved were purchased solely due to the (fallacious) promise of “full self-driving.”

And, of course, there will be a massive “valuation reappraisal” for Tesla’s stock as the world wakes up to the fact that its so-called “autonomy technology” is deadly, trailing-edge garbage. Meanwhile, the NHTSA continues to report a slew of Autopilot-related deaths, yet Tesla has sold this trashy software for over six years now:

…and still promotes it on its website via a completely fraudulent video! (For all Tesla-related deaths cited in the media—which is likely only a small fraction of those that have occurred—please see TeslaDeaths.com.)

Want to see another Elon Musk/Tesla fraud summarized in a simple bar graph? In this recent Consumer Reports test, note which of these cars never comes close—in any environmental conditions—to meeting its claimed EPA range:

Another favorite Tesla hype story has been built around so-called “proprietary battery technology.” In fact though, Tesla has nothing proprietary there—it doesn’t make them, it buys them from Panasonic, CATL and LG, and it’s the biggest liar in the industry regarding the real-world range of its cars.

And if new-format 4680 cells enter the market, even if Tesla makes some of its own, other manufacturers will gladly sell them to anyone, and BMW has already announced it will buy them from CATL and EVE.

And oh, the joke of a “pickup truck” Tesla previewed in 2019 (and still hasn’t shown in production-ready form) won’t be much of “growth engine” either.

As by the time it’s in mass-production in late 2023/early 2024 it will enter a dogfight of a market vs. Ford’s hot-selling all-electric F-150 Lightning and GM’s fantastic 2023 electric Silverado (which already has nearly 200,000 reservations), while Rivian’s pick-up has gotten excellent early reviews, and Ram will also be out with a great electric truck in 2024.

Regarding safety, as noted earlier in this letter, Tesla continues to deceptively sell its hugely dangerous so-called “Autopilot” system, which Consumer Reports has completely eviscerated; God only knows how many more people this monstrosity unleashed on public roads will kill despite the NTSB condemning it.

Elsewhere in safety, the Chinese government forced the recall of tens of thousands of Teslas for a dangerous suspension defect the company spent years trying to cover up, and Tesla has been hit by a class-action lawsuit in the U.S. for the same defect.

Tesla also knowingly sold cars that it knew were a fire hazard and did the same with solar systems, and after initially refusing to do so voluntarily, it was forced to recall a dangerously defective touchscreen.

In other words, when it comes to the safety of customers and innocent bystanders, Tesla is truly one of the most vile companies on Earth. Meanwhile the massive number of lawsuits of all types against the company continues to escalate.