Stanphyl Capital: The Tesla Motors Inc (TSLA) DeceptionVW Staff
Stanphyl Capital letter to investors for the month of March 2016 discussing their short position in Tesla Motors. Stanphyl was up almost double digits in Q1 2016. Also for in-depth coverage of Stanphyl’s latest small cap killer picks check it out -> here.
In addition to SPY we remain short what I believe to be the market’s biggest single-company stock bubble, Tesla Motors Inc. (ticker: TSLA; March close: $229.77) which in February reported a horrendous Q4 for 2015, with normalized free cash flow of negative $660 million (-$30 million from operations, $414 million in capex and subtracting the one-time $216 million of cash created by liquidating finished-goods inventory by selling several thousand more cars than the company produced). In fact, the free cash flow number was so bad that in the earnings release the company actually omitted it (after including it in previous ones) and instead substituted several completely nonsensical self-created metrics of its own. Then on the conference call Tesla said that under one of its whacky definitions of “cash flow” 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.
As the “mass market” Model 3 is currently getting the most attention from the Tesla hype machine, I’ll point out that in Q4 2015 the company 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 a car—even one 20% smaller—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. As we’re short the stock, I actually do hope it stickers the car at $35,000 and gets a trillion “reservations,” as the more it sells the more money it will lose. In reality though, Tesla 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 small Tesla 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 when you read stories about the Model 3 “driveable prototype,” keep in mind that Tesla 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. 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 a 0-60 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.” Perhaps the most interesting thing about the Bolt is that its 60kWh battery pack (made by LG) weighs just 960 pounds while the 60kWh Tesla pack (when it was offered) weighed 1125 pounds, a significant disadvantage for Tesla. Even if the Tesla pack’s housing was somewhat handicapped by needing to be large enough for the 85/90kWh models and thus as a 60kWh “pureplay” its weight might be closer to the Bolt’s, the Bolt’s energy density-per-pound at the pack level seems to show that the assembly, housing and cooling complications of Tesla’s method of wiring together many thousands of separate Panasonic cylindrical batteries vs. Chevrolet/LG’s much simpler use of just 288 prismatic cells makes Tesla’s first-to-market approach obsolete. As de facto proof of this, every manufacturer currently developing an EV has the option of using Tesla’s “thousands of cells” approach yet (as far as I know) none of them are; it thus seems clear that large-format prismatic batteries—not available with sufficient energy density at an attractive price when the Tesla Models S&X were designed—are now the superior approach and thus may render Tesla’s Gigafactory obsolete even before it opens.
The Tesla Model X Disaster
Meanwhile, Tesla’s rollout of its new Model X has been a disaster, with various enthusiast forums 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. And those orders that do exist are being delivered in ultra-slow motion as Tesla—which despite years of delays clearly did inadequate Model X testing—attempts to fix the vehicle’s problems (although of course its massive size problem is unfixable). In addition to its design, manufacturing and quality problems, the X’s $5000-$7000 premium to a comparable Model S sedan will be 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 220 miles starts at $81,000 with only five seats standard. By comparison, the all-new seven seat Mercedes GLS starts at an estimated $65,000, the Porsche Cayenne at $58,000, the Audi Q7 at $55,000, the BMW X5 at $55,000 and the beautiful new (and award-winning) Volvo XC-90 at just $44,000, and all these vehicles average more than twice the range of the Tesla with far faster and more flexible refueling capabilities for long trips.
Tesla 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 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 “reliability issues” force it to provide.
The 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 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 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 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 tells deception after deception after deception after deception after deception after deception.
So in summary, this cash-burning Musk vanity project is worth vastly less than its current approximately $36 billion fully diluted enterprise value and—thanks to over $3 billion of debt plus its credit line—may eventually be worth “zero.”