Tesla Inc (TSLA) Is A Busted Growth Story – Stanphyl

Tesla PG&E Recession

Stanphyl Capital‘s commentry for the month ended May 31, 2020, discussing Tesla Inc (NASDAQ:TSLA) is now a busted growth story.

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Tesla Is A Busted Growth Story

We remain short Tesla Inc. (TSLA), which I still consider to be the biggest single stock bubble in this whole bubble market. The core points of our Tesla short thesis are:

  • Tesla has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of electric car technology, while existing automakers—unlike Tesla­—have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably, as well as the ability to subsidize losses on electric cars with profits from their conventional cars.
  • In 2020 Tesla will again lose money, as it has every year in its 17-year existence.
  • Tesla is now a “busted growth story”; revenue growth is flatlining while unit demand for its cars is only being maintained via price cutting.
  • Elon Musk is a securities fraud-committing pathological liar.

In May, faced with a shortage of demand in an increasingly competitive (see the many links below) electric car environment during an economic depression, Tesla cut prices across the board. Nothing’s more amusing than seeing this giant stock promotion of a company continue to add capacity (expanding its Chinese factory while supposedly breaking ground on brand new factories in Texas and Germany) in order to desperately try to maintain an image of “limitless demand” as it continually slashes prices to unprofitable levels (excluding its unsustainable emission credit sales and accounting fraud) just to utilize its existing capacity.

Tesla’s Q1 Earnings

In April Tesla reported $16M in Q1 “earnings” thanks entirely to the sale of $354M in 100% margin emission credits that disappear after next year when other automakers no longer need to buy them as they’ll have enough EVs of their own. Additionally, Tesla’s earnings are typically inflated by around $200M/quarter from its ongoing warranty fraud (here’s an excellent Seeking Alpha article and another one in Fortune explaining some of this), so adjusted for these two factors Tesla would have lost over $500M in Q1, while free cash flow was minus $895M. This is not a viable business. Additionally, Tesla pulled all guidance for the rest of the year, and for good reason as Q2 (with sales dead and the U.S. factory closed for two months due to the coronavirus) will be a lot worse. And as @TeslaCharts pointed out on Twitter, Tesla is no longer a growth company:

Busted Growth Story

(One caveat is that in Q2 Musk may try to recognize part of $600 million in non-cash [it’s already on the balance sheet] deferred revenue from its fraudulently named “Full Self-Driving” [the capabilities of which offer nothing of the kind], thereby turning a money-losing quarter into one showing paper profits. Meanwhile, God only knows how many more people this monstrosity unleashed on public roads will kill, despite February’s NTSB hearing condemning it as dangerous.)

Meanwhile, here’s a great graphic from Twitter user @clausMller17 clearly demonstrating Tesla’s blatantly fraudulently EPA range claims for its cars:

Busted Growth Story

Tesla’s EV market share in Europe (as of now the world’s most competitive EV market) continues to erode as new competition enters the market. Here’s a great graphic from Twitter user @fly4dat showing what’s happening in Norway, Europe’s largest and most advanced EV market:

Busted Growth Story

For those of you looking for a resumption of growth from Tesla’s upcoming Model Y, demand for that car is reportedly disastrous. This is unsurprising, as it will both massively cannibalize sales of the Model 3 sedan and (later this year and in 2021) face superior competition from the much nicer electric Audi Q4 e-tron, BMW iX3 (in Europe & China), Mercedes EQB, Volvo XC40 and Volkswagen ID.4, while less expensive and available now are the excellent new all-electric Hyundai Kona and Kia Niro, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7500 U.S. tax credit. Meanwhile, the Model 3 will have terrific direct “sedan competition” later this year from Volvo’s beautiful new Polestar 2, the BMW i4 and the premium version of Volkswagen’s ID.3.

And if you think China is the secret to the resumption of Tesla’s growth, let’s put that market in perspective even without the coronavirus problem: prior to a recent 10% sales tax exemption Tesla was selling around 30,000 Model 3s a year there, and “the story” is that avoiding the 15% tariff and that 10% sales tax will allow it to sell a lot more. There’s also a $3600 EV incentive available (which will be reduced over the next two years), but China just cut to 300,000 yuan the maximum price allowed for an EV to get it; Tesla is thus slashing its Model 3 price from 323,000 yuan to qualify and will now make little-to-nothing on the car, and thus all volume increases will be profitless. Meanwhile the rule of thumb for the elasticity of auto pricing is that every 1% price cut results in a sales increase of up to 2.4%. If we assume a 2.4x “elasticity multiplier,” domestically produced Model 3s that are 40% cheaper (than the original price at the 30,000/year sales rate) would result in annual sales of just 59,000 (40% x 2.4 = 96% more than the previous 30,000), meaning Tesla’s new Chinese factory would be a massive money-loser vs. its initial 150,000-unit annual capacity and the 500,000/year capacity it will supposedly have in 2021. Even if we were to increase the previous sales rate by 150% to 75,000 cars a year, it would be massively disappointing for Tesla bulls and the factory will be a huge money-loser.

Meanwhile, sales of Tesla’s highest-margin cars (the Models S&X) will be down by over 50% worldwide this year vs. their 2018 peak, thanks to cannibalization from the less expensive Model 3 and direct high-end competition (especially in Europe and China) from the Audi e-tron, Jaguar I-Pace, Mercedes EQC and Porsche Taycan, with multiple additional electric Audis, Mercedes and Porsches to follow, many at starting prices considerably below those of the high-end Teslas. (See the links below for more details.)

And oh, the joke of a “pickup truck” Tesla introduced in November won’t be any kind of “growth engine” either, especially as if it’s ever built it will enter a dogfight of a market.

Meanwhile, Tesla has the most executive departures I’ve ever seen from any company; in May it was reported that the V.P. of Europe & Global Supply Chain and yet another deputy general counsel abandoned ship;  here’s the astounding full list of escapees. These people aren’t leaving because things are going great (or even passably) at Tesla; rather, they’re likely leaving because Musk is either an outright crook or the world’s biggest jerk to work for (or both). And in January Aaron Greenspan of @PlainSite published a terrific treatise on the long history of Tesla fraud; please read it!

In May Consumer Reports completely eviscerated the safety of Tesla’s so-called “Autopilot” system; in fact, Teslas have far more pro rata (i.e., relative to the number sold) deadly incidents than other comparable new luxury cars; here’s a link to those that have been made public. Meanwhile Consumer Report’s annual auto reliability survey ranks Tesla 23rd out of 30 brands (and that’s with many stockholder/owners undoubtedly underreporting their problems—the real number is almost certainly much worse), and the number of lawsuits of all types against the company continues to escalate– there are now over 800 including one proving blatant fraud by Musk in the SolarCity buyout (if you want to be really entertained, read his deposition!).

So here is Tesla’s competition in cars (note: these links are regularly updated)…

And in China…

Here’s Tesla’s competition in autonomous driving…

Here’s where Tesla’s competition will get its battery cells…

Most car makers will use those battery cells to manufacture their own packs. Here are some examples:

Here’s Tesla’s competition in charging networks…

And here’s Tesla’s competition in storage batteries…

So in summary, Tesla is about to face a huge onslaught of competition with a market cap approximately double that of Ford, GM and Fiat Chrysler combined, despite selling around 400,000 cars a year while Ford, GM and Fiat-Chrysler sell 5.4 million, 7.7 million and 4.4 million vehicles respectively. Thus, this cash-burning Musk vanity project is worth vastly less than its $155 billion market cap and—thanks to nearly $30 billion in debt, purchase and lease obligations—may eventually be worth “zero.”

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