Tesla Motors short – excerpted from Stanphyl Capital’s April 2016 letter to investors
For April 2016 the fund was up approximately 2.1% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 0.4% while the Russell 2000 was up approximately 1.6%. Year to date the fund is up approximately 11.4% net while the S&P 500 is up approximately 1.7% and the Russell 2000 is unchanged..
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In addition to SPY I increased our short position in what I believe to be the market’s biggest single- company stock bubble, Tesla Motors Inc. (ticker: TSLA; April close: $240.76) which in April reported 14,820 Q1 car sales vs. the 16,000-car guidance, and vs. over 17,000 in the previous quarter. Tesla Motors blamed this guidance miss on Model X parts shortages but failed to explain the nearly 5000-car sequential drop in Model S deliveries, only around 2000 of which can be attributed to a Q4 rush to beat an expiring tax credit in Denmark. Due to that Q1 delivery miss I now expect Tesla’s Q1 free cash flow will set a new “negative record” at somewhere around minus $600 million before adding back any of the refundable Model 3 deposits, a highly specious concept in itself, as discussed below. Of course it won’t surprise me if in its earnings release the company omits the free cash flow figure as it did for the Q4 release (after including it in previous ones) and instead once again substitutes several completely nonsensical self-created metrics of its own. Remember that on the Q4 conference call Tesla said that it would be cash flow positive for 2016 including the borrowings on its credit line. In other words, Tesla is trying to define “borrowed money” as “cash flow”— just par for the course for this highly deceptive company.
Meanwhile, as a great demonstration of what an untrustworthy stock-pumper Elon Musk is, note that he was well aware of the significant Q1 delivery miss and yet never mentioned it during the April weekend he spent Tweeting about nonsensically large Model 3 “orders” and revenue projections that he created by assuming 100% sell-through on fully refundable deposits for a car those depositors think they’ll receive in 2018 or ’19 but the bulk of which won’t be delivered until 2020 or ’21 at a significantly higher price than he claims, and by which time there will be 30 or so competing long-range EVs on the market. Perhaps equally significant is that Musk outright lied when he said Tesla is limiting Model 3 reservations to two per person—a friend tested this and was easily able to reserve 20, the bulk of which were done using the same credit card, name, phone number, email address, etc. I thus have no doubt that a significant number of Tesla’s claimed Model 3 reservations are in fact speculative duplicates, and I call upon the company’s underwriters to carefully scrub through the list before selling stock or debt on Tesla’s behalf.
As for potential Model 3 profitability, in Q4 2015 Tesla averaged an $18,400 GAAP loss on every Model
S it sold despite a starting price of $70,000 and an average price that ran much higher. So how does anyone with a brain in his head think this company can make money selling Model 3s—even if they’re 20% smaller than the S—starting at $35,000? I sure didn’t when I first wrote about this over two years ago and more recent analysis reinforces that conclusion and UBS—the only large sell-side firm not conflicted by Tesla Motors investment banking business—agrees. And here’s perhaps the best article about the Model 3 yet written. As we’re short the stock, I actually do hope the car stickers at $35,000 and gets a trillion “reservations,” as the more Tesla sells the more money it will lose. In reality though, the company will probably only be willing to sell Model 3s in the $50-$60,000 range (thereby substantially limiting its appeal), larded up with “options” that will be standard on mid-level Hondas by the time the car is available. Of course the idea that the Model 3 can be in mass production by late 2017 (as Tesla claims) is
a pipe dream, considering that the company’s February 2016 10-K states: “We have not yet finalized the design, engineering or material and component sourcing plans for Model 3.” So now that you’ve seen the “driveable prototype,” keep in mind that Tesla Motors did the exact same thing with the Model S a full 3.5 years before it was in mass production, and even if we were to credit Tesla with “additional experience” and shave a full year off that figure, it wouldn’t put the Model 3 in meaningful production before late 2018. But hey, while you’re waiting don’t forget to reserve your $49,000 Model S! Oh, and one other thing: if Tesla goes belly up before your Model 3 is delivered, your $1000 deposit will make you just another unsecured creditor; i.e., a generous donor into the pockets of the $3 billion of bondholders who will auction off whatever’s left of the company.
Meanwhile in January General Motors formally introduced its new Bolt EV which really will sell for $37,500 (before the $7500 Federal tax credit) and offers true five-passenger seating, a range of over 200 miles and a0-60 time of under 7 seconds for HALF the price of the cheapest Tesla Model S while matching its 94 cubic feet of interior passenger space (albeit with less storage). Seeing as studies show that 15% of Tesla buyers come from a Prius and many others come from other inexpensive “eco-favorable” cars, I expect the Bolt to grab back a significant number of them—what I call the “stretch buyers” who paid up for a Tesla because they wanted an electric car with 200-miles of range; those people can instead now choose the much less expensive/easier to park Bolt which will be available late this year, probably two years before “the comparably priced Model 3 that won’t really be comparably priced.” And then of course plenty of potential wait-listed Model 3buyers—realizing they won’t get a car until 2020 or later—are likely to pick up a Bolt instead too, or perhaps the 200-mile Leaf which is rumored to be out by mid-2017.
Meanwhile, Tesla’s rollout of its new Model X has been a disaster, with various enthusiast forums and now Consumer Reports reporting myriad problems with its “falcon-wing” doors, seats and general build quality, as well as a very low confirmation rate for the refundable “orders” the company claims to have.
In fact, in mid-April Tesla Motors opened up Model X ordering to anyone (not just those with reservations) and promised delivery a month later; as the company can manufacture approximately 750 Model Xs per week, this would seem to indicate that the backlog is tiny. I thus expect overall 2016 Tesla deliveries to be only around 65,000 vs. guidance of 80-90,000 (a huge miss), with only 20,000 or fewer of them being the X. In addition to its design and quality problems, the X’s $6000 to $8000 premium to a comparable Model S sedan is a huge sales-limiting factor, as nearly all of the luxury competition prices its premium SUVs considerably less expensively than its premium sedans. For instance, the most basic “X” with no options and a range of just 237 miles starts at $84,200 with only five seats standard. By comparison, the Porsche Cayenne starts at just $58,000, the Audi Q7 at $55,000, the BMW X5 at $55,000, the new (and award- winning) Volvo XC-90 at just $44,000, the new Jaguar F-Pace at just $40,990 and the new seven seat Mercedes GLS at $67,000, and all these vehicles average more thantwice the range of the Tesla with far more flexible refueling capabilities for long trips.
The heretofore revered Tesla Model S is now on Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability” and I think that raises a VERY important point: the “Tesla love” and “Tesla loyalty” that one reads about on the forums (“Even if my Tesla is in the shop a lot I’ll never go back to an ICE [Internal Combustion Engine] car!”) is really “EV loyalty”/“EV love”—in other words, many people like the instant torque and quietness of their EV drivetrains, not necessarily the fact that those frequently repaired drivetrains happen to come from Tesla. This means that when the Germans (Audi, Porsche, Mercedes and BMW) roll out their 300-mile luxury EVs in just two to three years, they’ll capture a lot of Tesla Motors owners who love the driving experience but not the reliability experience, especially as fear grows that Tesla’s cash bleed means it may not be around to honor the eight-year drivetrain warranty that those “reliability issues” force it to provide. Meanwhile, Tesla Motors owners are getting to make lots of new friends at their local service centers (for which there are reportedly one-month waiting times for an appointment), as guess who’s at the very bottom of TrueDelta’s car reliability list, ranked 54th:
he big picture issues for Tesla are twofold (note: these links are updated monthly): 1) The market is under the mistaken impression that it has significant & sustainable proprietary technology when it doesn’t, doesn’t,doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t,
doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in cars (in fact LG now offers a complete turnkey electric drivetrain to any manufacturer who wants one) and many of these EVs will be sold at or below cost (subsidized by the profits from their makers’ conventional cars), thereby creating intense pricing/margin pressure on Tesla; it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t,doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in car batteries (where even its sole supplier Panasonic is going into direct competition with it via a factory unrelated to Tesla’s still 85% unfunded Gigafactory); it doesn’t,doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t,doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t,doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in storage batteries (where its supplier Panasonic is going into direct competition with it both at utility scale and in the home) and the Tesla PowerWall has no business model anyway as partially proven in March when Tesla discontinued 50% of its hype-driven home product line; it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t,doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in autonomous driving while even the new $20,000 Honda Civic offers nearly autonomous driving; and it doesn’t and doesn’t in charging (Tesla has spent only around $200 million on its much-touted Supercharger network, a rounding error for the inevitable upcoming charging consortiums of big auto makers), and 2) The company’s management tellsdeception after deception after deception after deception after deception after deception after deception afterdeception.
So in summary, this cash-burning Musk vanity project is worth vastly less than its current approximately $37 billion fully diluted enterprise value and—thanks to its debt—may eventually be worth “zero.”
