The Tesla “Hypergrowth” Story Is Over – Shortseller

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Stanphyl Capital letter to investors for the month ended August 31, 2022, discussing their short thesis for Tesla Inc (NASDAQ:TSLA).

It’s becoming increasingly obvious that the Tesla “hypergrowth” story is over. Here are the company’s most recent quarterly deliveries:

Q4 ‘21: 309,000

Q1 ‘22: 310,000

Q2 ‘22 & Q3’s estimate averaged to account for pent-up Q3 demand from Q2’s China factory closing: 312,000.

Q2 2022 hedge fund letters, conferences and more

 

Tesla’s Production Capacity Is Outstripping Incoming Orders

Tesla delivery wait times worldwide are now declining substantially, which by definition means that its newly expanded production capacity is outstripping its rate of incoming orders despite the new German and Texas factories producing at only around 20% of capacity!

This means one thing and one thing only: big, margin-slashing Tesla price cuts are needed to resume meaningful unit delivery growth, and in fact in late August the first such cut happened, with Tesla introducing in Europe a new rear-wheel drive Model Y that sells for as much as $20,000 less than the cheapest model (an all-wheel drive version) available here in the U.S. Sure, if Tesla slashes prices enough it will undoubtedly be able to use its excess capacity, but so can any other car company. Welcome to the auto business, which currently sells for around 5x earnings!

Meanwhile, 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:

  • 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 greater than the next 13 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.

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 due to a monthlong COVID-related closing of Tesla’s Shanghai factory, and thus that month of pent-up demand will undoubtedly make Q3’s figure significantly better than it otherwise would be (which is why I averaged the two figures a few paragraphs above).

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 didn’t pay 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 $0.65/share (adjusted for August’s 3:1 split) including roughly .10/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 the one-time .03/share loss for the aforementioned Bitcoin sale and deduct the sunsetting credit sales, we get annualized adjusted run-rate earnings of just $2.32, giving Tesla an annualized run-rate PE ratio (as of the end of August) of 119 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.”

Loss Of Product Edge

Meanwhile, 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 Chinese competition

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 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.

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 this year 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 90% 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 May 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 2 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 nearly 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 was 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.)

crashes involving autonomous driving systems

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

Tesla software

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

Nothing Proprietary

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 BMW has already announced it will buy them from CATL and EVE.

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

Stanphyl Capital