The Chinese Government’s Love Affair With Tesla Is Over

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Stanphyl Capital‘s commentary for the month ended May 2021, discussing their short position in Tesla Inc (NASDAQ:TSLA).

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Q1 2021 hedge fund letters, conferences and more

Tesla's Disadvantages

As noted earlier, we remain short the biggest bubble in modern stock market history, Tesla Inc. (TSLA), which currently has a diluted market cap of approximately $706 billion, nearly 80% of the $910 billion (non-diluted) combined market caps of Toyota ($231 billion), VW ($180 billion), Daimler ($100 billion), GM ($86 billion), BMW ($69 billion), Stellantis ($61 billion), Ford ($58 billion), Honda ($53 billion), Hyundai ($52 billion) and Nissan ($20 billion), despite annualized sales for Tesla of 740,000 cars a year to their over 50 million. The core points of our Tesla short thesis are:

  • 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.
  • Excluding sunsetting emission credit sales Tesla still loses money, as it has every year in its 17-year existence.
  • Unit demand for Tesla’s cars is only increasing via continual price cutting.
  • Elon Musk is a pathological liar who under the terms of his SEC settlement cannot deny having committed securities fraud.

Q1 Earnings Results

In April Tesla reported results for Q1 2021, and excluding $594 million of pure-profit emission credit sales (an income stream that nearly disappears after this year when other automakers have enough EVs of their own, $101 million in Bitcoin trading profits and an ASU-related accounting change, it again lost over $200 million (and that’s without deducting its obvious warranty reserve fraud). This loss is partially summarized (excluding the accounting change) in this chart from Twitter user @TESLACharts:

Tesla Stanphyl

Also, revenue declined sequentially from Q4 2020, as did unit deliveries outside of China, and even in China Tesla’s Q1 EV market share plunged while deliveries grew by just 10,000 cars, thanks entirely to the introduction of the Model Y. And in May it became clear that the Chinese government’s love affair with Tesla is over, and Q2 Tesla China sales are shaping up to be a disaster—April was terrible and May is looking awful too!

And for those who think Tesla is really “an energy company,” for the second consecutive quarter the energy division had a negative gross margin, as graphed here by @TESLACharts:

Tesla Stanphyl

Now, let's put Tesla's Q1 earnings report into context, valuation-wise:

If we tax-adjust and remove Q1’s emissions credit, Bitcoin profits and beneficial accounting change (none of which are sustainable contributors to the operating business), Q1 GAAP income was around minus $220 million. However, in fairness to Tesla, stock comp (due to Musk’s massive options awards) was excessive at $614 million. If we add back Musk’s $299 million of that we get normalized GAAP earnings of around $79 million = $0.07/diluted share = $0.28/share annualized = (at May’s closing price of $625.22/share) a current annualized run-rate PE ratio of 2233 (no, that is not a misprint!) for a low-margin car business (and negative margin energy business) with negative sequential revenue comps and massive legal and financial liabilities continually generated by a pathologically lying CEO. An industry multiple of 12x earnings using $0.28 as a normalized annual GAAP number would make TSLA stock worth just $3.36 a share, and one could argue that having such a lying CEO means it merits a discount to the industry.*

*In late May a U.S. Senate committee passed a proposed renewal of the electric vehicle tax credit. If passed in its generous proposed form (a big “if”), I believe this would mean only an additional .31/share for annual Tesla earnings. Here’s a Twitter thread explaining why.

And contrary to what bullish Teslemmings may tell you, Tesla’s Q1 sales were nowhere near being “production constrained,” as it built 180,000 cars (and delivered 184,000) while claiming quarterly production capacity of 262,500:

Tesla Stanphyl

(For Q2, chip shortages may actually be restricting Tesla production and even causing its unsafe removal of radar, although unlike every honest company in the world, Tesla has so far failed to directly address this issue.)

Perpetuating Being Supply Constrained

Short-term chip shortages aside, nothing is more amusing than seeing this giant stock promotion of a company try to perpetuate the illusion of being “supply constrained” by continuing to add capacity in order to desperately try to maintain an image of “limitless demand” while it continually utilizes far less than its existing capacity. Tesla’s “plan” is now obvious: keep slashing prices (with occasional recent small bumps to partially compensate for soaring input costs) to move as much volume as possible while using the world’s most illicitly creative accounting to maintain razor-thin profitability. But what’s the end game? If Tesla stops cutting prices growth will collapse. Tesla is no longer “a growth story”—it’s a nearly-profitless stock (and Bitcoin!) promotion for idiots!

Meanwhile, the quality of Tesla’s all-important Model Y is awful, and that car faces current (or imminent) competition from the much better built electric Audi Q4 e-tron, BMW iX3, Mercedes EQA, Volvo XC40 Recharge, Volkswagen ID.4, Ford Mustang Mach E, Nissan Ariya, Hyundai Ioniq 5 and Kia EV6, as well as the smaller & less expensive yet excellent all-electric Hyundai Kona and Kia Niro. And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2 and the premium version of Volkswagen’s ID.3 (in Europe), and later this year from the BMW i4.

And in the high-end electric car segment worldwide the Audi e-tron and Porsche Taycan outsell the Models S & X (and the almost indistinguishably updated new “Plaid” versions won’t change this), while the spectacular new Mercedes EQS and Audi e-Tron GT make Teslas look like Yugos.

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 it will enter a dogfight of a market; in fact, in May Ford formally introduced its terrific new all-electric F-150 Lightning and it got 45,000 orders in fewer than two days.

And now the Tesla “autonomy story”—presumably responsible for hundreds of billions of dollars of its market cap—is falling apart. In May there was yet another deadly “Autopilot” crash (now made even more deadly via the removal of radar sensors—for all known Tesla deaths see, and the 2021 overview from Guidehouse Insights rates Tesla dead last among autonomous competitors:

Tesla Stanphyl

As for owns the most self-driving patents, according to Nikkei Asia Tesla isn’t even in the top 10 (and I’d be surprised if it were even in the top 20):

Tesla Stanphyl

In fact, now Tesla itself admits it may never achieve full autonomy, as does Musk personally:

Tesla Stanphyl

In reality, that’s just the Fraudster-in-Chief’s whining excuse for not using LiDAR, radar and high-definition maps in his cars (unlike the rest of the industry). So for once I agree with Musk: with the current (and promised future) Tesla hardware suite, none of its cars will ever achieve full autonomy. Yet that doesn’t stop him from charging $10,000 for a product he explicitly calls “Full Self Driving.” Where are the FTC and SEC on this? As the Wall Street Journal recently reported: nowhere.

Meanwhile, Tesla quality ranks 30th among 33 brands in the latest J.D. Power survey…

Tesla Stanphyl

…and second-to-last in the latest Consumer Reports reliability survey:

Tesla Stanphyl

…while the most recent What Car? survey shows similar results with Tesla finishing #29 out of 31.

Tesla Has Nothing Proprietary

As for batteries, Tesla has nothing proprietary—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.

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, in 2020 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 now 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.

So here is Tesla's competition in cars (note: these links are regularly updated)…

And in China...

Here's Tesla's competition in autonomous driving...

Here's where Tesla's competition will get its battery cells...

Here's Tesla's competition in charging networks...

And here's Tesla's competition in storage batteries...

Thanks and stay healthy,

Mark Spiegel