Tesla Isn’t Paying Some Of Its Bills! – Shortseller

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Tesla Cyberquad EV Tax Credits

Stanphyl Capital’s commentary for the month ended July 31, 2022, discussing their short position in Tesla Inc (NASDAQ:TSLA).

Tesla, starting with Elon Musk’s continually spewing fountain of bullshit summarized in just two tweets, the first one last week…

Tesla

…and the second one from over seven years ago…

Tesla

What’s the matter, Elon? Are you running out of new bullshit? Meanwhile, here’s my take on Tesla’s disastrous service times:

Tesla

Tesla

Elon Musk remains the most vile person ever to head a large-cap U.S. public company, and we remain short Tesla, the biggest bubble-stock in modern market history, because:

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  • It has a sliding share of the world’s EV market and a share of the overall auto market that’s only around 1.5%, yet a market cap roughly equal to the next 16 largest automakers (by market cap) combined despite selling only around 2% of the cars they do.
  • It has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of its electric car technology (which has now been equaled or surpassed by numerous competitors) and its previously proprietary Superchargers are being opened to everyone), 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.
  • Excluding working capital benefits and sunsetting emission credit sales Tesla generates only minimal free cash flow.
  • Growth in sequential demand for Tesla’s cars is at a crawl relative to expectations.
  • Elon Musk is a pathological liar.

One Good News

Let’s start with the one potential piece of moderately good news for Tesla, because pretty much everything else that happened this month was bad. Late in July, Manchin announced he’d made a deal with Schumer to extend the $7500 EV tax credit which Tesla lost a couple of years ago. However, due to the new program’s price caps, only Tesla’s cheapest, short-range Model 3 qualifies, along with its Model Y which sneaks in as a “small SUV” (which have higher price caps), despite simply being a Model 3 with a bloated, guppy-like body stuck on it. But there are new income cutoffs restricting who can use these credits: $150,000 for an individual and $300,000 for a married couple, which will eliminate a number of potential Tesla buyers. If we then add in the fact that myriad great and less expensive Model Y competition has now arrived, with much more coming in 2023 when the credits begin, I see this government spending boondoggle adding perhaps 100,000 deliveries a year for Tesla; i.e., a rounding error for its market cap and volume projections. And now for the rest of the news…

In July Tesla reported a terrible Q2, with deliveries down 26% from Q1 (which itself showed no growth over Q4). However, Q2’s sales decrease was primarily due to a monthlong COVID-related closing of Tesla’s Shanghai factory, and thus it might be a while before we can get a “clean” demand picture for the company.

Unpaid Bills

Regardless, in Q2 Tesla generated only $621 million in stated free cash flow, yet that included a sequential increase in payables (and decrease in receivables) despite a $1.8 billion decrease in revenue! (In other words, Tesla isn’t paying some of its bills!) Additionally, there was a $106M operating cash flow benefit from a Bitcoin sale, so adjusting for the working capital and Bitcoin benefits Tesla was barely free cash flow-positive. Meanwhile, earnings were just $1.95/share including roughly .30/share of emission credit sales which will disappear some time next year when competitors have enough EV capacity of their own. If we add back in the one-time .09/share loss for the aforementioned Bitcoin sale and deduct the sunsetting credit sales, we get annualized adjusted run-rate earnings of just $6.96, giving Tesla an annualized run-rate PE ratio (as of July’s end) of 128 in an industry with an average current multiple of only around 5! And even to make that lousy earnings number Tesla (an alleged “technology growth company”) had to slash R&D spending sequentially by almost $200 million while simultaneously claiming a mysterious reduction in SG&A despite opening two brand new factories in the quarter that Musk called “gigantic money furnaces.”

Regardless of any Q2 sales shortfalls caused by the temporary factory closing, Tesla has objectively lost its “product edge,” with many competing cars now offering comparable or better real-world range, better interiors, similar or faster charging speeds and much better quality. (Tesla ranks second-to-last in Consumer Reports’ reliability survey while British consumer organization Which? found it to be one of the least reliable cars in existence.) Thus, due to competitors’ temporary production constraints, waiting times are now longer for many of Tesla’s direct EV competitors than they are for a Tesla. (Here’s one example, and here’s another.)

In fact, Tesla is likely now the second, third or fourth choice for many EV buyers, and only maintains its volume lead though a short-lived edge in production capacity that will disappear over the next 12 to 36 months as competitors rapidly increase the ability to produce their superior EVs. Tesla’s poorly-built Model Y faces current (or imminent) competition from the much better made (and often just better) electric Hyundai Ioniq 5, Kia EV6, Ford Mustang Mach E, Cadillac Lyriq, Nissan Ariya, Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 Recharge, Chevrolet Blazer EV and Polestar 3. And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2, the great new BMW i4, the upcoming Hyundai Ioniq 6 and Volkswagen Aero, and multiple local competitors in China—here, from Snowbull Capital’s @TaylorOgan, is just one example of that Chinese competition:

Tesla

And in the high-end electric car segment worldwide the Porsche Taycan (the base model of which is now considerably less expensive than Tesla’s Model S) outsells the Model S, while the spectacular new Mercedes EQS, Audi e-Tron GT and Lucid Air make it look like a fast Yugo, and the extremely well reviewed new BMW iX and Mercedes EQS SUV do the same to the Model X.

The worst thing that can possibly happen to “the Tesla story” will be when its German and Texas plants are fully operational and the subsequent excess capacity stares the world right in the face, thereby ending its myth of “unlimited demand” (especially at current, drastically-raised prices, where the cheapest Model 3 now starts at $47,000 and the cheapest Model Y begins at $66,000); in fact, look for margin-destroying price cuts by late this year or early 2023.

Tesla Is Netflix

Indeed, for years I’ve said “Tesla is Blackberry”—the maker of a first-generation version of a product that—once the market was proven—would be supplanted into niche obscurity by newer, better versions; now I can provide a much more recent analogy: Tesla is Netflix. For years Netflix had an absurd valuation based on its pioneering position in streaming media, but once it proved that such a market existed myriad competitors swarmed all over it, and in April the stock collapsed when we learned that not only is Netflix no longer in “hypergrowth” mode but for the first time since 2011 (when it transitioned from physical DVDs) it actually lost subscribers. I believe Musk knows that Tesla is “the next Netflix” (hence his recent “Twitter buying distraction”), with VW, Hyundai/Kia, Ford, GM, BMW, Mercedes, BYD & other Chinese competitors and, in a few years, Toyota & Honda, being the Disney, HBO Max, Amazon Prime, Peacock, Hulu, Paramount +, etc., of the electric car market, stealing Tesla’s share and eventually pounding its stock price down 95% or so from today’s, into the valuation of “just another car company.”

Despite this obvious “writing on the wall,” many Tesla bulls sincerely believe that ten years from now the company will be twice the size of Volkswagen or Toyota, thereby selling around 20 million cars a year (up from the current run-rate of around 1.3 million); in fact in March Musk himself even raised this as a possibility. Setting aside the absurdity of selling that many cars at Tesla’s high price points, to illustrate the “logistical absurdity” of this, going from 1.3 million cars a year today to 20 million in ten years means that in addition to two million cars a year of sold-out existing claimed production capacity (once the German and Texas factories are fully operational), Tesla would have to add 36 more brand new 500,000 car/year factories with sold out production; i.e., a new factory almost every single quarter for the next ten years!

Meanwhile, in July the head of Tesla’s “self-driving” program quit, while in June the NHTSA announced that its investigation of Tesla’s deadly Autopilot has expanded into “an engineering analysis,” the last required step before (finally!) demanding a full recall. The refund liability potential for Tesla for this is in the billions of dollars, and possibly even the tens of billions if a class action lawsuit proves that the cars involved were purchased solely due to the (fallacious) promise of “full self-driving.” And, of course, there will be a massive “valuation reappraisal” for Tesla’s stock as the world wakes up to the fact that Tesla’s so-called “autonomy technology” is just trailing-edge garbage. As of July, the NHTA is investigating 48 crashes involving autonomous driving systems, 39 of which—and all the deaths but one—involve Tesla. (For all Tesla deaths cited in the media—which is likely only a small fraction of those that have occurred—see TeslaDeaths.com.)

Tesla

And Tesla has sold this trashy software for almost six years now:

Tesla

…and still promotes it on its website via a completely fraudulent video!

Another favorite Tesla hype story has been built around so-called “proprietary battery technology.” In fact though, Tesla has nothing proprietary there—it doesn’t make them, it buys them from Panasonic, CATL and LG, and it’s the biggest liar in the industry regarding the real-world range of its cars. And if new-format 4680 cells enter the market some time in 2024 (as is now expected), even if Tesla makes some of its own,  other manufacturers will gladly sell them to anyone.

And oh, the joke of a “pickup truck” Tesla previewed in 2019 (and still hasn’t shown in production-ready form) won’t be much of “growth engine” either, as it will enter a dogfight of a market; in fact, Ford’s terrific 2022 all-electric F-150 Lightning now has over 200,000 retail reservations (plus many more fleet reservations), GM has introduced its fantastic 2023 electric Silverado which already has nearly 200,000 reservations and Rivian’s pick-up has gotten excellent early reviews.

Regarding safety, as noted earlier in this letter, Tesla continues to deceptively sell 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. Elsewhere in safety, the Chinese government 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 also knowingly sold cars that it knew were a fire hazard and did the same with solar systems, and after initially refusing to do so voluntarily, it was forced to recall a dangerously defective touchscreen. 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 massive number of lawsuits of all types against the company continues to escalate.

So Here Is Tesla’s Competition In Cars…

(note: these links are regularly updated)

And In China, Where Tesla’s EV Market Share Is Now Declining…

Here’s Tesla’s Competition In Autonomous Driving; The Independents All Have Deals With Major OEMs…

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,

Mark Spiegel

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