Long TSLA: History Repeats Itself (Money Where Your Mouth is Edition)

A Blast from the Past

It has been 5 years since @Whitehat" performed financial Seppuku and paid for my kids’ college education (thanks @WhiteHat"!), and the consensus is the same now as it was then: Musk is a charlatan, Tesla is going under, and CuriousCharacter is an idiot…

And for good reason!

Musk still receives government support, Tesla still uses interest free loans from future customers, the company is still behind on production goals, the end product still has important flaws and CuriousCharacter still can’t keep his big mouth shut.

Noted short seller Jim Chanos has taken things a step further and pointed out what appear to be major threats to Tesla as a going concern, including but not limited to:

• Technology Lag
• Material Misstatements Surrounding Product Development
• Questionable Accounting Practices
• New, Formidable Competitive Forces
• Executive Departures

Any one of these factors would be enough to seriously harm a large, stable enterprise, so who knows what kind of damage they could do in aggregate to Tesla.

The More Things Change...

Do Chanos’ complaints sound familiar? They should - WhiteHat made many of the same observations our last go ‘round, namely:

“Remember when Tesla promised 100 supercharger stations within 12 months...but haven't announced the opening of a new one in over 4 months? 13 in California by the end of 2013 if they're lucky.”

"Also, let’s not forget about Detroit Electric company, a new Tesla-lite firm that is marketing a $135,000 luxury EV that may compete with the higher-end Model S configurations. While they could easily flop due to Tesla’s great name recognition, we can’t deny that if anything it can only have a negative impact on TSLA.

"Their gross margin on cars is continually misrepresented and is, in fact, still negative and likely to stay that way for a while."

In fact, beyond WhiteHat, Jim Chanos, and Wall Street as a whole, it seems like the majority of people have been saying the same things - and predicting Tesla’s demise - since company inception:

Competitive Threats? Check and Check

Executive Departures? Check, Check, and Check

There was even a Tesla Death Watch (!) back in 2008

Forest for the Trees

But I wonder if people on the short side have, in Chanos’ words, “crossed the Rubicon in making statements that they might rue later.” Chanos points to Audi, GM, and Waymo as proof that Tesla is behind in the race to full autonomy. However if you actually look at the data, you’ll find that:

Audi only achieves “level 3” autonomy

- the car must be traveling at less than 37 mph in a traffic jam on a highway.

Waymo does not have access to anywhere near the amount of data required for effective machine learning.

And while GM does provide a compelling self driving experience, even theirs is considered a toss up against Teslas.

But “let’s not forget about Detroit Electric,” a company WhiteHat referenced as a future threat to Tesla’s bottom line… Despite 5+ years and raising more than $2.2 billion dollars, Detroit Electric is long forgotten.

Well what about the low end of the market, the Nissan Leaf? Nissan touted pre-orders of 56,000, all the way back in 2010!...unfortunately, sales peaked in 2014, and as of now they are delivering less than 1000 per month.

Chanos: “Porsche is coming.” I’m cautiously optimistic that Porsche will release a compelling electric sports car. For my money, Porsche makes the highest quality production sports cars in the world, and they appear to be bringing their A-game.

That said, the Mission E is still listed as a concept car with an 85k price tag, so Porsche doesn’t look to be competing with Tesla’s near super car priced 200k+ vehicle… and even if they are, the market is big enough to support more than one manufacturer.

The wild card here is the list of executive departures, which is exceedingly long. That said, Tesla just announced a group of new executives so as to the material impact, your guess is as good as mine.

As for the questionable accounting practices, more on this later.

Better Late Than Never

"I always deliver what I say, just maybe not in the time frame that I say it" - Elon Musk

WhiteHat: Remember when Tesla promised 100 supercharger stations within 12 months - Indeed we do Whitehat, indeed we do! It’s now the middle of 2018, and there are now 1,229 superchargers worldwide.

Regarding timelines, if one took the time to actually read the reports or listen to what Musk has to say, they would know he mostly issues rough guidelines. And for those keeping score, check out Bloomberg’s reporting, which includes the following statistics:

• 54 Tracked Projects
• 20 Completed
• 14 Late
• Average Delay: 139 Days, 46% longer than original target

From First Principles

Let’s take a step back and once again consider the most common Tesla objections:

• Tesla has lots of executive departure, similar to Enron
• Competition, like Porsche, is coming
• Tesla accounting does not follow industry convention, like GM
• Technology providers, like Waymo, offer comparable solutions

Analysts look at what a company is doing, and then compare it to what they believe are similar organizations and look for patterns. In Elon’s words, this is “reasoning by analogy,” and every single analyst report I’ve seen follows this playbook to the letter.

This one, by UBS, gets closer to first principles.

UBS took the time to literally tear down a Chevy Bolt to its component parts, and then reasoned up costs from there. The report contains a ton of very interesting information (most of which is beyond the scope of this post) and I recommend it to everyone here, however it is 95 pages long so let me distill the most relevant bits:

“We estimate GM loses $7.4k (EBIT) with every Bolt sold today, mainly due to the lack of scale. Because of many similarities between the Bolt and Tesla's long-awaited Model 3, we estimate Tesla incurs an EBIT loss of $2.8k per vehicle in its base version, but will break even at an ASP of $41k. As Tesla buyers are likely to order well-equipped versions (margins on the options should be ~50%), the required ~$41k threshold is likely to be well exceeded."

In our view EV manufacturing costs are likely to be lower than previously expected, which means: (1) profitability for OEMs can be better; and (2) volumes can grow faster, leading to better economies of scale and a faster return on current high investments.”

We believe the profitability analysis of the Bolt can to a large extent be applied also to the upcoming Tesla Model 3. What is similar: Base version pricing, range / battery capacity, single e-motor with two-wheel drive, about the same interior space. What is different: Higher premium appeal of the brand (more pricing power and longer list of profitable options), different battery chemistry and more scale in battery manufacturing (Gigafactory), rear-wheel drive instead of front-wheel drive (all-wheel drive version at a later stage), more connectivity functionality (eg, over-the-air-upgrades) and autonomy-relevant hardware as standard (cameras, sensors), and better likely fixed cost absorption thanks to more ambitious production targets (>10x vs. the Bolt).

"Further to that, there are differences in the distribution model and marketing. While Tesla receives the entire MSRP thanks to its fully-owned distribution operations and lack of discounting, GM's MSRP includes a ~15% mark-up for the independent dealerships and incentives. This also implies Tesla has higher distribution costs in SG&A. "

Now obviously this analysis isn’t from “first principles,” - UBS applies analogies from Chevy to Tesla - but by looking at and comparing the car from the ground up, it does get closer to axioms.

Munro Associates, however, did one better and

Munro heaps lots of valid criticism on Tesla including: too much automation on Tesla lines, lack of staff training, and low build quality on the model 3.

“In essence they ignored 200-300 years of experience… there were coach builders before there were car builders, and Tesla ignored the whole auto industry entirely.”

On the positive side: the car drives like it’s on rails, has f-1 quality suspension, the best battery ever, and the electronics are unlike anything ever produced for a vehicle.

Munro's final word?

“Anybody in the industry that ignores this car, does so at their own peril. This is revolutionary vs evolutionary and everyone else is sitting there twiddling their thumbs.”

Of the 4 most common complaints, the only one that has not been addressed is the “questionable accounting practices.” As Mr. Chanos points out, Tesla does things differently than other major automotive manufacturers, mainly separating R&D and SG&A expenses from gross margin per car. Why?

Because Tesla is a different kind of company. Tesla does not spend money on advertising, but it is building out a supercharger network (a long term profit center) and its own version of a dealer network. Furthermore, Tesla is an integrated energy solution provider with an initial focus on transportation, so comparing it to classic automakers is disingenuous at best.

Back to the Future

"Any investment is worth all the cash you're going to get out between now and judgment day discounted back. Warren Buffett

“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” Jeff Bezos

Tesla does not even come close to meeting the definition of a Graham type value investment, but I wanted to put these quotes here to illustrate one thing: what matters is the present value of future cash flows, and no company on earth is better positioned to capture the future cash flows of the multi-trillion dollar (and growing!) energy industry.

The future is electric. Tesla is the only company in the world capable of capturing the future energy cycle from soup to nuts - that is, energy generation, distribution, storage, and consumption. As the rest of the industry is forced (by Tesla) to move from an ICE past to an electric future - and “competition” increases - Tesla stands to benefit.

EV's OEM

Bar Chart

Bar Chart 2

Energy is energy, and the best way to extract the least value from fossil fuels is by burning them. Make no mistake, with applications in everything from farming to cosmetics, they will continue to be extremely valuable for years to come. But as a source of energy?

They are history, dinosaurs (see what I did there?). The laws of physics and the laws of economics demand it (Even OPEC now expects more than 250 million EV’s on the road by 2040 - side note, this is another very interesting albeit long article).

Don’t Get Emotional About Stock

To get back to my pointed and opinionated ways for a moment, we have used these bogus hype-machine opportunities to almost double our position, making Tesla our 2nd largest portfolio position and 3x as large as the next biggest holding in our short book. - WhiteHat

Bankers are herd animals by nature, and I’m starting to think that Wall Street is just pissed off that Elon thinks for himself, that he has the nerve to defy self-styled masters of the universe. Time and again Tesla and Musk have confounded the critics, and still the shorts are sickeningly arrogant in their thesis.

Investing is about finding a mispriced bet, and my money is on deep OTM TSLA call options. My downside risk (defined as permanent loss of capital) is limited to losing a (very) nice vacation.

My upside? Early retirement.

I’ll take that bet.

Come at me nerds.

CC

P.S.

Back in 2013, before the squeeze, WhiteHat complained about Tesla trading at 11x sales… As of May 25, 2018?

Price to Sales

It stands at 3.7x.