Stanphyl Capital update on the short bet against Elon Musk . Readers can see below for an excerpt on Tesla Inc (NASDAQ:TSLA) from their Stanphyl’s May 2018 letter.
We remain short shares of Tesla, Inc. (TSLA), which I consider to be the biggest single stock bubble in this whole bubble market—a company so landmine-filled that I think it can implode at any moment regardless of what the broad market does. To reiterate the three core points of our Tesla short position:
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1) Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
2) Tesla loses a huge (and increasing) amount of money despite relatively light competition but will soon be confronted with massive competition in every aspect of its business.
3) Elon Musk is extremely untrustworthy.
Early in May Tesla released a disastrous Q1 earnings report, with a record GAAP loss of $710 million ($760 million excluding the sale of ZEV credits– an average of over $25,000 per car sold!), negative free cash flow of $1.1 billion, Model S&X combined deliveries down a double-digit percentage both sequentially and year-over-year, and Model 3 production falling far short of (already drastically reduced) previous guidance. Here’s a terrific series of charts from Twitter user @TeslaCharts clearly explaining just how horrible the financial trends for this company are; in fact Tesla’s situation is so dire that it’s slashing capex (and thus killing the growth story) by apparently putting development of its much-hyped (but economically unviable) semi-truck on hold, as well as delaying its “Model Y” crossover. In fact even Tesla battery supplier Panasonic now has serious doubts about the viability of the company. And for those who continue to insist that as Tesla grows revenue, profits will “scale” proportionately… How’s this for “scale”?
Tesla’s interest expense alone is now at a run-rate of nearly $600 million a year, which in Q1 amounted to $4985 per car sold; in other words, roughly one-third of Tesla’s (artificially inflated) gross profit (and a much higher percentage of its *real* gross profit) went towards servicing its debt!
Keep in mind that Q1’s decline in S&X sales occurred even before Tesla’s first real luxury EV competition rolls into showrooms this summer in the form of the Jaguar I-Pace, followed this winter by the Audi E-Tron Quattro (to be unveiled in August) and then early next year by the Mercedes EQC (to be unveiled this September) and Porsche Mission E. And all those cars [except perhaps the Porsche] will be priced significantly less expensively than the comparable Tesla even before their U.S. buyers enjoy a $7500 tax credit that expires for Tesla later this year. (The base Porsche price is rumored to be the same $75,000 as the base Model S. Hmmm… tough choice!)
Following the release of that atrocious earnings report, Tesla hosted what may be the most hilarious conference call in American corporate history. (I know I’ve said that about previous calls but let’s face it: Musk is a conference call superstar who somehow manages to “top” his previous performance with each new one!) Here are just a few of the “highlights” as he tries to duck, shuck and jive his way out of having to explain away Tesla’s looming destiny with bankruptcy, which is where its > $30 billion in combined long-term debt and battery purchase & other obligations—accompanied by its negative cash flow and massive encroaching competition—will eventually place it.
The weekend after the disastrous conference call, Musk posted a series of bizarre tweets threatening to “burn the shorts.” Apparently, this previewed his buying TSLA shares the following Monday equal to approximately 1/1000th of his existing holdings, a chunk of which was done in the illiquid pre-market in a blatant attempt to jam up the price. Hello, SEC! A CEO’s obsession with “the shorts” should be a terrifying red flag for any long investor—just ask holders of Lehman about Dick Fuld’s comments shortly before it went bankrupt.
Next in May, Seeking Alpha published a great new overview of why the Model 3 will be a financial disaster for Tesla. Also, keep in mind that Bernstein Research estimates that fewer than 30% of current Tesla owners decided to exercise their Model 3 reservations, and based on anecdotal evidence from on-line Tesla forums it appears that the reservation uptake among non-Tesla owners may be as low as 15%. And watch those reservations really vanish when Tesla’s $7500 tax credits expire later this year while over 100 competing new EV models entering the market over the next few years will still enjoy them, and potential buyers realize that the $35,000 model may never appear.
In fact, in May Musk admitted that the $35,000 Model 3 is a long way off because “building one now would cause Tesla to lose money and die.” And have a look at this Musk Tweet from late-May, in which he references the all-wheel drive “Performance” version of the Model 3 (a tiny niche market car at best) which will cost $78,000 without Autopilot:
Think about that! The “Performance” Model 3 will be in production at a time Tesla adamantly states it will be making at least 5000 Model 3s a week, and yet Musk still says they’d be losing money selling the “regular” AWD version which, in the only available format (extended battery + premium package) will start at $55,000!
Meanwhile, extensive forum posts and reviews indicate that over time the Model 3 is revealing itself to be a complete lemon, and even after Tesla updated defective brake software that initially caused a “Not Recommended” rating, Consumer Reports rated it just a 77 on a scale of 100, tied (among electric cars) with the $14,000 cheaper Chevrolet Bolt and $25,000 cheaper Toyota Prius. (Unlike Edmunds, CR has yet to rate the Model 3’s reliability.) And remember, almost nothing can be done in the Model 3 without a multi-step process on the touchscreen—not even changing the windshield-wiper speed, adjusting the air vents or opening the glovebox. Thus, operating a Tesla Model 3 may potentially be as dangerous as texting while driving.
Also in May at least six more (!) key people left Tesla, including chief engineer Doug Field (who took an indefinite leave of absence in the middle of the crucial Model 3 rollout), Matthew Schwall, the company’s primary liaison with regulatory safety agencies (gee- I wonder why!), Arch Padmanabahn, the product director for the stationary storage unit, Bob Rudd, the head of commercial & utility sales, Sameer Qureshi, the head of Autopilot software, and Cal Lankton, the V.P. of Energy Sales & Operations. Recall that last month Jim Chanos said the only other companies where he’d seen such an accelerated rate of executive departures were Valeant and Enron (both of which, of course, collapsed in fraud). Chanos and his analysts have been updating the departure list regularly; email me if you’d like a copy.
Also in May Musk went on a bizarre, multi-day, Trump-like Twitter rant blaming “the media” for all his self-inflicted problems. There were lots of great “media takes” on this– two of the best came from the Los Angeles Times and Business Insider, while the funniest was definitely from Dealbreaker.
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its market cap tops that of Ford and is 80% of GM’s despite a $2.8 billion+ annualized net loss selling a bit over 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its nearly $60 billion fully-diluted enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”