Tesla In-Depth Short Thesis – July Update
Stanphyl Capital July 2018 letter to investors on Tesla Inc. (NASDAQ:TSLA)
We remain short shares of (and long put options in) 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:
Tesla has no “moat” of any kind; i.e., nothing meaningfully or sustainably proprietary.
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.
On July 1st Tesla released horrendously bad Q2 delivery numbers, with a huge miss for the Model 3 (18,440 units sold vs. expectations of 25,000-30,000) and combined Models S&X deliveries roughly flat from a year ago and negative year-to-date. (Tesla will release its Q2 financial report on August 1st; I expect a record GAAP loss of around $800 million excluding ZEV credit sales.) Concurrent with the aforementioned Q2 delivery release (and in a Musk Tweet the night before), Tesla proudly proclaimed that it had produced nearly 7000 cars over the last seven days of the month. Closer examination by Reuters, however, confirmed the suspicion we raised in last month’s letter that such as pace was unsustainable and, most shockingly, Elon Musk ordered the factory not to perform an important brake test on the cars in order to meet his self-proclaimed production number. Is that (along with unleashing his reckless Autopilot and not recalling potentially dangerous suspensions) yet another sign that Musk a sociopath? (You can guess my answer!) And (as you’ll see a few paragraphs below) even at a July production average of fewer than 4000 a week, it appears that Tesla is already overproducing Model 3s relative to demand.
Before we dig more deeply into the Model 3, keep in mind that the aforementioned declining Model S&X delivery numbers come even before the widespread availability this September of the new Jaguar I-Pace electric SUV which received fabulous reviews (and handily beats Tesla in comparison tests) and is $13,000 cheaper than the Model X and $7000 less than the Model S, gaps that will widen substantially as Tesla’s tax credits phase out beginning in January (more on that below). And the Models S&X sales decline is also occurring before the near-term introduction of an onslaught of other luxury EVs in addition to the Jag— the Audi e-tron to be formally unveiled in September and available in Europe this winter and the U.S. next spring, the Mercedes EQC, also to be unveiled in September and available next spring, and the Porsche Taycan (previously called the Mission E), available late 2019. And all those cars (except the Porsche) will be priced significantly less expensively than the comparable Tesla even before their U.S. buyers enjoy the $7500 tax credit that will soon expire for Tesla, while the Porsche’s base price will be similar to that of the base Tesla Model S. Hmmm, Tesla or Porsche… tough choice!
In July Tesla announced that it has delivered its 200,000th car (since inception) in the U.S., meaning that after December 31st its $7500 tax credit will be cut to $3750 for six months, then $1875 for six months and then goes away completely. As this realization sinks into the minds of those awaiting the mythical $35,000 base-priced Model 3 (a car delayed multiple times already and now unavailable at least until sometime in 2019, if ever), look for an onslaught of reservation cancellations, as hinted in this fine article from the L.A. Times.
In fact, perhaps the biggest Tesla story this month is the seeming evaporation of Model 3 backlog, at least for the versions currently being sold with a starting price of $50,000. Tesla has now abandoned its “reservation list” and thrown open orders to all comers while (as evidenced in on-line forums) reducing the delivery time to as little as one month; here’s an excellent summary of that situation. In fact, in July two giant lots in California were discovered holding thousands of Model 3s baking in the sun, some of
The Model 3 will not be the savior of Tesla; in fact, regardless of whether Tesla hits its 5000 per week production goal (and Twitter user @skabooshka has gathered data indicating that July’s average weekly Model 3 production was under 4000), the car will be a financial disaster, with an EBIT break-even cost I estimate to be in the mid-$50,000s at best. And perhaps most laughably, Tesla is now using inexperienced employees from other departments to hand-build them! (Hey SEC: make sure Tesla allocates those solar, service tech and engineering salaries to “Cost of Automotive Sales” while those corporate transplants are working those assembly lines; otherwise it may try to further falsify its gross margin as it does with its warranty under-reserve!)
Meanwhile, extensive forum posts and reviews indicate that the Model 3 is revealing itself to be a complete lemon; here’s one small survey on a fanboy forum indicating (even with a heavy pro-Tesla sampling bias that likely includes a large percentage of shareholders) that 62% of them had at least one defect during the first 30 days of ownership…
…and Edmunds found the Model 3’s reliability to be disastrous. And when you do need service (and you will, regularly!) good luck getting it, with multi-week waits for appointments and multi-month waits for parts! 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.
Among other Tesla-related events in July, Musk inserted his name into the Thai cave rescue story by incessantly tweeting about a useless Thermos-like “mini-sub” he was building to “fly to the rescue” of the trapped soccer team. I normally wouldn’t cover this kind of self-promoting, circus-like event here as it’s peripheral to Tesla, but I really wanted an excuse to link to this hilarious 53-second clip of the chief diver expressing his opinion about Musk and his “invention.” In response to that comment Musk called the man a pedophile before being forced to issue a “ half-assed apology.” Then later in the month Musk—being the insecure, thin-skinned bully that he is— silenced one of Tesla’s most eloquent and financially sophisticated bears—a pseudonymous blogger using the name “Montana Skeptic”—by whining to his boss and having
Also in July Musk flew to China to announce that Tesla has received permission to build a wholly-owned factory in the Shanghai free trade zone. Omitted from this story, however, is the fact that cars built in Chinese free trade zones still must pay a 15% tariff if sold into the rest of the Mainland, putting them at a massive price disadvantage to joint-venture (or native) competitors. Also omitted from this
“announcement” was any mention of how broke-ass (sorry, I mean “nearly insolvent”) Tesla will finance this venture. In fact, this much ballyhooed announcement was so fundamentally important that Tesla never even filed an 8-K for it. And oh, by the way, China already has 487 electric-car makers. Have fun being #488, Tesla!
Also in July Tesla whistleblower Martin Tripp (who first came forward in June after being outed by the company itself) announced that a well-known attorney has agreed to take his case to the SEC on contingency (implying strong confidence in its veracity). Among Tripp’s allegations are that Tesla knowingly installed dangerously defective batteries in some of its Model 3s and lied to investors about the Model 3 production rate, thereby pumping its stock. Much of this is detailed in his defamation claim against Tesla, is pretty damn ugly and convincing. And you know that old expression about corporate malfeasance that says “there’s never just one cockroach”? Well this tweet was posted in early July by Mr. Tripp’s SEC lawyer…
…followed by this one a few weeks later:
If you recall, I wrote last month that Tesla may be under an undisclosed Wells Notice, and if that’s the case (and this is speculative) it may explain why it hasn’t been able to take advantage of its high stock price to raise fresh equity. In last month’s letter I included an interesting graphic layout of the circumstantial evidence for this; feel free to email me if you’d like to see it. At least part of the case may be related to Musk’s alleged commitment of securities fraud by using Tesla to bail out his (and his family’s) failing stakes in SolarCity; Zero Hedge included an excellent summary of this by Twitter user @TeslaCharts in this story about SolarCity’s latest retrenchment, which will undoubtedly help fuel the fraud case currently working its way through a Delaware court, as will this later story describing how Tesla sales people have no idea when the solar tiles or PowerWalls used to justify that merger will ever be available. (Remember that when Musk was promoting that merger he used fake solar tiles on a fake house at a movie studio… How appropriate!)
Also in July a memo leaked to the Wall Street Journal revealed that Tesla is begging its suppliers for retroactive rebates, calling the needed cash “essential to Tesla’s continued operation.” Tesla’s vague response to the story seemed to indicate that it revolved around slashing capex, both retroactively and going forward. (Goodbye growth story!) In fact, Tesla is now in such bad financial shape that all sorts of liens are piling up against it in its home county of Alameda.
Also in July it was announced that Tesla chief automotive engineer Doug Field was officially quitting his job after taking an undetermined leave of absence earlier in the year. He joins a long line of departing Tesla executives— a list so long that Jim Chanos recently said that the only other times he’d seen anything like it was during the waning days of Enron and Valeant. Congratulations, Tesla: you’re a company in great company!
Meanwhile, Tesla is increasingly besieged by a wide variety of lawsuits for securities fraud, labor discrimination, worker safety, union-busting, sudden acceleration and lemon law violations, new ones appear on a regular basis.
Finally (before our regular monthly links), I leave you with my favorite Tesla chart for July:
So here is Tesla’s competition in cars (note: these links are continually updated)…
2019 Audi E-Tron To Charge Faster Than Tesla Supercharger Network Audi e-tron Sportback in 2019 to be its second EV
Citroen preparing EV push with 80 per cent electrified range by 2023 Honda will offer full-EV or hybrid tech on every European model by 2025 All-electric Bentley four-door coupe to use EV tech from Porsche Mission E Subaru to introduce all-electric vehicles by 2021
And in China…
GM China raises new-energy vehicle target to 20 models through 2023 Nissan & Dongfeng to invest $9.5 billion in China to boost electric vehicles Toyota to Introduce 10 New Electrified Vehicles in China by 2020
Chinese carmaker Byton unveils its fully autonomous rival to Tesla’s electric sedans Chinese-backed electric car start-up Byton woos CES with model 40% cheaper than a Tesla Great Wall Starts New EV Brand (ORA) In China
Here’s Tesla’s competition in autonomous driving…
Magna’s new MAX4 self-driving platform offers autonomy up to Level 4 Bosch Creates a Map That Uses Radar Signals for Automated Driving Honda Targeting Level 3 Automated Driving By 2020, Level 4 by 2025
Mitsubishi Electric Develops Automated Mapping For Autonomous Driving Hitachi demonstrates vehicle with 11-function autonomous driving ECU DENSO and NEC Collaborate on Automated Driving and Manufacturing
Here’s Tesla’s competition in car batteries…
ABB teams up with Northvolt on Europe’s biggest battery plant Chinese Battery Maker to Open Factory Next to Swedish EV Plant
Here’s Tesla’s competition in storage batteries…
SOLARWATT Schneider Electric sonnenBatterie Kokam
Kreisel Leclanche Lockheed Martin
Sunverge Stem ENGIE Exergonix Redflow Renault
Adara Blue Planet
Tabuchi Electric Younicos Orison
Moixa Powin Energy Nidec Powervault Schmid
24M Terra E Eelpower Ecoult
And here’s Tesla’s competition in charging networks…
Chargepoint Europe Gets $82 million in new funding from Daimler ChargePoint – InstaVolt partnership; more than 200 UK rapid charge systems UK’s Podpoint installing 150kW EV rapid chargers this year; 350kW by 2020 UK National Grid plans 350kW EV charge point network
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
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 nearly equals GM’s despite a $2.8 billion+ annualized net loss selling approximately 200,000 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 over $60 billion fully-diluted enterprise value and—thanks to its roughly $31 billion in debt and purchase obligations—may eventually be worth “zero.”