Tesla is no longer “a growth story”—it’s a nearly-profitless stock promotion for idiots!, Says Shortseller

Stanphyl Capital’s letter to investors for the month ended December 2020, discussing that Tesla‘s expected 180,000 delivery figure for Q4 2020 is not production constrained.

Q3 2020 hedge fund letters, conferences and more

We remain short the biggest bubble in modern stock market history, Tesla Inc. (TSLA), which currently has a non-diluted market cap of approximately $675 billion, which is roughly equal to those of Toyota, Volkswagen, GM, Daimler, BMW, Honda, Hyundai, Ford, Fiat-Chrysler and Nissan combined (!) despite run-rate sales of around 700,000 cars a year to their approximately 65 million. 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.
Excluding sunsetting emission credit sales and adjusted for its fraudulently low warranty reserve (see below), in 2020 Tesla will again lose money, as it has every year in its 17-year existence.
Unit demand for Tesla’s cars is only increasing via continual price cutting.
Elon Musk is a pathological liar who under the terms of his SEC settlement cannot deny having committed securities fraud.

Tesla Expected To Report Deliveries In The 180,000s For Q4

In early January, Tesla (as of December the biggest bubble-stock ever indoctrinated into the S&P 500) is expected to report deliveries in the 180,000s for Q4 2020, and contrary to what bullish investors may tell you, this figure is not “production constrained,” as an October 8-K reported that Tesla’s current production capacity is 210,000 cars per quarter:

Nothing is more amusing than seeing this giant stock promotion of a company try to perpetuate the illusion of being “supply constrained” by continuing to add capacity (expanding its Chinese factory while breaking ground on new factories in Texas and Germany) in order to desperately try to maintain an image of “limitless demand” while it continually slashes prices just to utilize far less than its existing capacity. Tesla’s “plan” is now obvious: keep slashing prices to move as much volume as possible while using the world’s most illicitly creative accounting to maintain razor-thin profitability. But what’s the end game? If Tesla stops cutting prices volume will collapse. Tesla is no longer “a growth story”—it’s a nearly-profitless stock promotion for idiots!

While we don’t yet have Tesla’s Q4 financial results, we can briefly recap Q3’s: excluding $397 million of pure-profit emission credit sales (an income stream that begins shrinking imminently then likely disappears after 2021 when other automakers have enough EVs of their own) and a $43 million one-time D&O insurance payment received to compensate the company for its directors’ complicity in the self-dealing SolarCity buyout, in Q3 Tesla would have reported just $77 million in pre-tax income attributable to common stockholders.

However, Tesla’s Q3 warranty provision was only $175 million for 129,579 non-leased cars, which is just $1350/car despite a long history of replacing motors, battery packs and suspensions under warranty (often fraudulently reclassified as “customer goodwill repairs”) as its cars age, plus repaintings, etc. due to their poor build quality. If Tesla’s warranty provision were a more honest $3000/car it would have meant an additional $214 million hit to Q3 gross margin, lowering pre-tax income to negative $137 million. Indeed, warranty provisioning is perhaps Tesla’s most fraudulent accounting maneuver.

In fairness to Tesla though, Q3 had a non-repeating compensation expense of $338 million for Elon Musk’s egregious pay package, so let’s add that back to pre-tax income and call Tesla’s Q3 “honest & normalized pre-tax GAAP income” -$137 million + $338 million = $201 million. If we then adjust that for a typical 28% tax rate we get an estimated $145 million in after-tax GAAP income, which is an annualized rate of $0.53/share. Thus, at December’s closing price of $705.67/share Tesla has a normalized GAAP run-rate PE ratio of 1331 vs. a PE of around 10x for the rest of the auto industry, despite year-over-year declining Tesla deliveries in Europe (in an electric car market that grew approximately 100% during that same period!) and Q3 U.S. revenue that was lower than it was two years earlier:

Uptick In Tesla's China Growth Story

On the other hand, there was a big Q4 uptick in Tesla’s “China growth story,” with November sales of 21,604 vs. roughly 11,000-12,000 for each of the previous six months. However, as with almost everything Tesla-related, this comes with a very big caveat…

In October Tesla cut its Chinese Model 3 price by a whopping 8%, enabled entirely by the use of a much cheaper “LFP” battery formulation, thereby driving that large November sales number. Apparently though, the cheaply formulated battery that enabled that price cut is a piece of electrical garbage, providing drastically less cold-weather range than anticipated and charging much more slowly, both in China and in the cars exported to Europe. In other words, those cars are highly inferior to their predecessors, and as word of this circulates it’s highly unlikely that this sales pace can continue, especially as China’s EV competitive landscape is about to get vicious.

Meanwhile, although in Q4 Tesla may sell around 50,000 cars in China, GM will likely sell nearly 800,000 and Ford will sell over 160,000. And as noted above, while in November Tesla sold 21,604 cars in China; the table below courtesy of Gasgoo.com shows how everyone else did; as you can see, Tesla is just a flea in an elephant-sized market:

And for those of you who still think Tesla “is years ahead of the competition,” the most competitive EV region in the world is Europe, and in addition to Tesla’s outright year-over-year Q3 (and likely Q4) sales decline there, its European EV market share has dropped from over 30% to just an estimated 11% (and in 2021 will likely be much lower). Courtesy of Twitter user @fly4dat, here’s a great chart showing that:

Model Y's Quality Is Awful

As for Tesla’s newest “hope,” the Model Y, its quality is awful and it faces current (or imminent) competition from the much better built electric Audi Q4 e-tron and Q4 e-tron Sportback, BMW iX3, Mercedes EQB, Volvo XC40 Recharge, Volkswagen ID.4, Ford Mustang Mach E and Nissan Ariya, as well as the less expensive yet excellent all-electric Hyundai Kona and Kia Niro. Meanwhile, Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful new Polestar 2 and the premium version of Volkswagen’s ID.3 (in Europe), and in 2021 from the BMW i4.

And oh, the joke of a “pickup truck” Tesla previewed in 2019 won’t be much of “growth engine” either, as it will enter a dogfight of a market.

And in the high-end segment worldwide, the Audi eTron now outsells either of Tesla’s offerings (the Model S and the Model X).

Meanwhile, Tesla ranks second-to-last in the latest Consumer Reports reliability survey:

…and last among 31 brands J.D. Power surveyed…

…while the latest What Car? survey shows similar results with Tesla finishing #29 out of 31.

As for batteries, Tesla has nothing proprietary—it doesn’t make them, it buys them from Panasonic, CATL and LG. And here’s a great graphic from @clausMller17 showing Tesla’s blatantly deceptive range claims:

Recalls For A Dangerous Suspension Defect

Regarding safety, the Chinese government recently forced the recall of tens of thousands of Teslas for a dangerous suspension defect the company spent years trying to cover up, and now Tesla has been hit by a class-action lawsuit in the U.S. for the same defect. Tesla has also been hit with at least one well-documented sudden acceleration class action lawsuit and for years knowingly sold cars that it knew were a fire hazard, and did the same with solar systems. And of course it continues to sell and promote its hugely dangerous so-called “Autopilot” system, which Consumer Reports has completely eviscerated; God only knows how many more people this monstrosity unleashed on public roads will kill, despite the NTSB condemning it as dangerous. 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. In other words, when it comes to the safety of customers and innocent bystanders, Tesla is truly one of the most vile companies on Earth. Meanwhile the number of lawsuits of all types against the company continues to escalate, including one proving blatant fraud by Musk in the SolarCity buyout. (If you want to be really entertained, read his deposition!)

Finally, Tesla has the most executive departures I’ve ever seen from any company; here’s the astounding full list of escapees. Telas seemingly hasn’t been able to hire or even retain a high-profile executive from outside in years; clearly no one with any real-world experience wants to work for Elon Musk.

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…

Here’s Tesla’s competition in charging networks…

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

Thanks, stay healthy, and here’s to a much better 2021 in every possible way!

Mark Spiegel

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