Whitney Tilson’s email to investors discussing TIME names Elon Musk ‘Person of the Year’; avoid Rivian Automotive Inc (NASDAQ:RIVN); more on the Digital World Acquisition Corp (NASDAQ:DWAC) grift; funny memes; Trevor Noah on Musk, Formula One, and Peloton.
Q3 2021 hedge fund letters, conferences and more
Elon Musk Named Person Of The Year
1) TIME Magazine named Tesla Inc (NASDAQ:TSLA) and SpaceX CEO Elon Musk its Person of the Year on Monday. The Financial Times has also named Musk its Person of the Year.
Though I have been highly critical of some aspects of his behavior, Musk is an extraordinary engineer, innovator, and entrepreneur who has made a massive impact on the world, so I think TIME made an excellent choice. The magazine's 13-minute interview with him is here, and below is an excerpt from the article:
This is the man who aspires to save our planet and get us a new one to inhabit: clown, genius, edgelord, visionary, industrialist, showman, cad; a madcap hybrid of Thomas Edison, P.T. Barnum, Andrew Carnegie, and Watchmen 's Doctor Manhattan, the brooding, blue-skinned man-god who invents electric cars and moves to Mars. His startup rocket company, SpaceX, has leapfrogged Boeing and others to own America's spacefaring future. His car company, Tesla, controls two-thirds of the multibillion-dollar electric-vehicle market it pioneered and is valued at a cool $1 trillion. That has made Musk, with a net worth of more than $250 billion, the richest private citizen in history, at least on paper. He's a player in robots and solar, cryptocurrency and climate, brain-computer implants to stave off the menace of artificial intelligence and underground tunnels to move people and freight at super speeds. He dominates Wall Street: "The way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk," Bloomberg columnist Matt Levine wrote in February, after Musk's "Gamestonk!!" tweet vaulted the meme-stock craze into the stratosphere.
As a reminder @JeffBezos also was named Time man of the year in 1999 The stock dropped from that point 95% over the next 22 months. It's the ultimate sentiment peak. pic.twitter.com/x5zNFrxPE0
— Thomas Thornton (@TommyThornton) December 13, 2021
I looked it up: Amazon's stock closed at $97 on the day TIME published this issue on December 20, 1999. Twenty-one months later, on September 27, 2001, it hit an all-time low of $5.67, a decline of 94%. (Since then, it's been a 600-bagger – wow!)
I don't think Tesla is going to decline by 94% – or anything close to that. And, as I've said for years, I continue to believe the stock is a bad short. But I will say this: as I scan the 100 companies with the largest market caps that trade in the U.S., Tesla jumps out at me as the one that could cost investors the most money, the fastest...
Avoid Rivian
2) That is not to say, however, that I think Tesla is most at risk for the highest percentage decline among the top 100...
The clear winner (loser?) here in my mind is another electric-vehicle ("EV") company, Rivian Automotive (RIVN). With a $103 billion market cap, it's the 87th-most valuable public company in the U.S., more than General Motors (GM) ($85 billion) or Ford Motor (F) ($80 billion), despite not having delivered a single car or generated a single dollar of revenue. (Read that sentence again...)
I agree with my colleagues Enrique Abeyta and Gabe Marshank, as I wrote in Monday's e-mail:
... they're certain that the market caps of electric-vehicle makers Lucid (LCID) and Rivian Automotive will fall at least 50% – and likely 70% – from their current $163 billion combined [market cap] (at which point, they both might be good long-term buys).
Someone posted a well-articulated bear case for Rivian on my favorite stock idea website, ValueInvestorsClub. I can't share a link to the entire write-up, as it's a members-only site, but here's the introduction:
Disclaimer: A short thesis report on Rivian seems almost too obvious to post. And how much value can be added on a name that hasn't produced much of anything and can't be modeled with any precision? Perhaps it's in helping bring this idea top of mind and particularly the combination of extreme valuation and easy borrow. We're living through a historic period of speculation and bubbles at least in certain parts of the market. EVs, as one of the major mega-themes of the day, are a magnet for bubbly stocks given the massive TAM [total addressable market] and unprecedented transformation that will occur. We generally prefer writing about and investing in stocks where we can build detailed models and incorporate meaningful financial analysis along with qualitative and macro views and insights and we almost always eschew valuation shorts for all the typical reasons.
In this case we are short Rivian because we believe even if they pull off the execution story of the century, and we are doubtful they can, we foresee many bumps in this long road between here and nirvana. With an expected delivery estimate of 1,000 cars in 2021, the company sports an almost $100B market cap, more than GM and Ford, despite the fact they will likely generate negative free cash flow for the next 5-10 years. Even Elon Musk commented on how absurd this is when he tweeted: "Maybe they should be required to deliver at least one vehicle per billion dollars of valuation *before* the IPO?" True, Amazon lost money for years on its way to dominance, however making vehicles is a capital-intensive business with incredible operational complexity. And in truth Rivian is trying to build and scale numerous complex businesses simultaneously.
Tesla has generated an industrial miracle before our eyes over the past decade, and that is probably one of the biggest reasons why Rivian can enjoy a $100B valuation before mass producing any cars. That said, Rivian's operational plan is even more ambitious than Tesla's as they seek to produce three new models (commercial, SUV, and pick-up) simultaneously. They are later to market, seek to sell to customers without dealerships, and must execute on an almost impossible operating plan. They also are emerging as a public company at a moment where the Fed is beginning a tightening cycle, IPOs this year have floundered (~75% now down from their IPO price) and investors are becoming more discriminating about long lived growth stories.
After rising 47% post IPO the company will soon be held accountable for executing their plan as they begin to mass produce and deliver vehicles. Even in an upside case they will face many operating challenges. To justify the current valuation, sell-side analysts are projecting deliveries 300% higher than IHS estimates for the next 5-7 years, and still on these uber aggressive production estimates, Rivian's valuation seems more appropriate for a software stock. Finally, the borrow is easy and cost low. We expect an exit opportunity on this short that can generate a 30-50% return over the next 12 months.
Thesis
Rivian Automotive represents a compelling short opportunity over the next 12-18 months as initial IPO exuberance fades and the many challenges of building a major automotive/commercial vehicle brand play out. Even [Tesla], who has seemingly successfully scaled their operations to produce first rate quality vehicles, was severely challenged operationally on numerous occasions and over years. In a few instances it almost went broke. At current IHS production estimates, and applying a generous EBITDA [earnings before interest, taxes, depreciation, and amortization] margin forecast, the company is trading at 6.2x estimated 2027 sales and 54x EBITDA (note: Tesla trades at 8.5x 2025 sales). We see both macro (hawkish fed, rate increases), and micro (numerous execution challenges) catalysts over the coming months/years to propel the stock lower, providing a compelling risk/reward even if Rivian eventually succeeds in its ambitious mission.
More On The DWAC Grift
3) Speaking of stocks likely to collapse and following up on what I wrote a week ago, here's Bloomberg's Matt Levine with more sordid details on Digital World Acquisition (DWAC), one of the most disgusting grifts I've ever seen (so much so that I think the SEC will block this deal): The Trump SPAC PIPE Is Free Money. Excerpt:
The result is that the PIPE [private investments in public equity] investors are committing $1 billion of money, but taking very little risk and getting very richly rewarded. They can – and, I expect, will – sell their stock as soon as the merger closes and TMTG [Trump Media & Technology Group] is public, and they'll sell at a huge guaranteed profit because they will buy their stock at a 40% discount to the stock price at the time they pay for it. Still, some risk: If the stock is below $10 by the time the deal closes, they will lose money on the trade.
Or that is what I said last week, but the trade is actually even better for the PIPE investors? Because here is the trade they can do:
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- Short DWAC stock now, locking in a sale price of about $56 per share.
- Buy back the stock at closing, from TMTG/DWAC, at a maximum purchase price of $33.60.
- Make $22.40 per share guaranteed.
Funny Memes
4) TIME's award has spawned lots of memes like this:
**LEAKED** The original Time Person of the Year cover for Elon pic.twitter.com/YMlHW252bV
— Trung Phan ?? (@TrungTPhan) December 13, 2021
And this:
Hedgeye's Person of the Year is Bill Hwang pic.twitter.com/m2c5BJ3Ne1
— Hedgeye (@Hedgeye) December 13, 2021
Trevor Noah on Musk
5) Rarely does a late-night comedian – in this case, Trevor Noah – comment on three stocks I follow: Tesla, Liberty Media Formula One (NASDAQ:FWONK), and Peloton Interactive Inc (NASDAQ:PTON) – plus, no politics! You can watch it here: CA's Sneaky Gun Law, TIME's Person of the Year & Peloton's SATC Stock Drop.
Best regards,
Whitney
P.S. I welcome your feedback at [email protected].
