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
under very specific conditions

- 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
completed a full tear down of a Model 3:

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.


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.



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.

Comments (48)

May 29, 2018

Very interesting article, read like an investment thesis

    • 3
May 29, 2018

MissionE will curbstomp Model S. Take that to the bank.

    • 1
May 29, 2018

Note where I said:

"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."

May 29, 2018

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May 29, 2018

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May 29, 2018

I'm not too fussy about the automation side. If they want to go fully autonomous, sure thing. My skepticism is with regards to them becoming the best selling electric car in the world. They weren't in 2017 (the BAIC-EC series was with 78,079 models sold) and I don't think they will be in 5 or 10 years time. By all means, they may have the greatest electric battery in the world but that's not their ambition. They want to make the world electric and that isn't going to happen with Tesla alone.

May 29, 2018

"Tesla's mission is to accelerate the world's transition to sustainable energy."

May 29, 2018

TLDR : Why am I tagged here?

twitter: @CorpFin_Guy

May 29, 2018

TLDR : Why am I tagged here?

He or she probably tagged you because he/she thinks you've provided interesting perspectives in the past and is looking for your commentary. Take it as a compliment.

May 29, 2018

TLDR : Why am I tagged here?

He or she probably tagged you because he/she thinks you've provided interesting perspectives in the past and is looking for your commentary. Take it as a compliment.

Why the fuck was I NOT tagged here? Seems like everyone but me was tagged.

Congrats to OP for owning the stock and repeatedly assramming white hat with his results.

    • 5
May 29, 2018

Yeah, I came off as a dick there...my apologies. I was running to a meeting and wasnt sure why I was tagged here.

That being said, I'm still not reading the OP's entire diatribe

twitter: @CorpFin_Guy

May 29, 2018

I have no idea what to think of Tesla. Tesla could be Apple in 10 years or it could be a footnote in history. If this were 10 or 20 years ago, it would be an easier call about whether or not Tesla succeeds. However, as I've mentioned in the past, we are at (or nearing) an inflection point in the auto industry with autonomous driving, ride-sharing, and electric cars all radically changing or about to radically change the landscape of transportation. It's impossible to say how the next decade will turn out and who will remain standing, but I've got to believe that over the next 10-20 years you will have substantial consolidation or straight-up auto company failures. If--and let me stress the word "if"--autonomous ride-sharing takes off (I think it will, but I'm only right 99.9% of the time) then say good-bye to most car companies--and by "most" we're talking all but a handful.

May 29, 2018

Every time there is a production snag on the Model 3s, there is an announcement from SpaceX or about Hyperloop or the Boring Company to try to keep people hype about the stock.

Musk may have been the first to successfully do the electric car thing, but he most definitely will not be the last. And when you look at how difficult a time he is having executing at the moment (and the shenanigans he pulls to keep people distracted), I think there is a high chance Tesla will be road kill 10 years from now.

Doesn't mean it won't be a stock worth holding at any point in the next few months and years, but if you think this a Buffett style play you're going to wake up in 20 years sorely disappointed.

Is there an oppurtunity in OTM calls? Maybe... but probably not the bet I would make first, or even second or third.

    • 2
May 30, 2018

"I couldn't care less," he added. "Please sell our stock and don't buy it."

Musk continued: "I mean, I think that if people are concerned about volatility, they should definitely not buy our stock. I'm not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go."

Musk has openly stated that he does NOT want to be the last electric car company.

People have been predicting Tesla's demise for over a decade now, always based on the same variables: executive departures, delays in hitting production goals, new competition...

I also said that this is quite obviously NOT a value stock.

There seems to be something about the company (or its CEO) that causes revulsion among a certain set of people, because they always seem to disregard the plainly obvious.

Oh well, excelsior!

May 29, 2018

One of the first stocks I would look to add during the short-medium term downturn; it will be overly depressed and I think worth a punt for the long term. Adding TSLA's not a bad "mad money" play given it's not an S&P 500 component despite being larger than the vast majority of the companies there - some diversification benefit plus upside. I'm not sure I would buy any stock today, though, unless there is a very long time horizon (retirement account).

May 30, 2018

Eh if Tesla gets added to the S&P 500, what do you think happens to the stock price?

May 29, 2018

TSLA is going the way of Blackberry (NYSE:BB)

Lots of subtle parallels.
- First major entrant into "innovative" market.
- Obtained celebrity/cult status. Religious following.
- Will quickly be overtaken by a superior company (that has heritage/reputation).

Mark this post, do whatever. Thank me in 5-7 years when TSLA is trading at $10-20 USD.

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    • 1
Most Helpful
May 29, 2018

To be fair, BB lost out to an established tech company but new entrant into the phone space (Apple) which had a revolutionary product. TSLA would have to drop the ball - I think VW/Porsche is the horse I would pick - established car company with reputation for niche/high quality that is entering the space. Luckily you could invest in both...

    • 3
May 31, 2018

That's one way to look at it...

Or you could think of Tesla as Apple trumping BBY
- fast follower, building a best in class version of a product that trumps legacy vendors
- Obtained ce/ebrity/cult status. Religious following
- Has cemented itself as the superior company.

May 30, 2018

I've said all I'm going to say on the matter, I wish you the best in your TSLA long position. let's just say agree to disagree

May 30, 2018

I can appreciate that, and thank you.

May 30, 2018

Long $TSLA for life!

Funny how people constantly talk about Tesla failing, it's the end of the company, etc, but all they did was miss some target deadline.
At the end of the day, they produce the best product in the industry they created (or clearly expanded) as per Thiel/Andreessen and others, and are doing it faster than anyone else.

Sure, they missed a lot of history and lessons that GM and others have learned over hundreds of years. They are now solving problems in less time than the other guys are even capable of. It's hard to see now, because they're so new and it looks like they're still catching up to the current dominators (only in terms of production of cars and a couple other things y'all get so hung up on), but in reality they're going at least 5x the speed of any other company and have their sights set on a different finish line, one that the other guys don't even know exists. It's kinda sad really.

The only question is whether or not they can keep up the pace, both output and creativity. I'd say even if they halved both in the next 20 years, they'll still become an epic force in the world- Apple/Amazon/Microsoft level.

    • 2
May 30, 2018

I agree with the sentiment, but I genuinely wonder how the car industry--not just Tesla--will be impacted by autonomous ride-sharing. I think the real key is how Tesla handles the coming technological shift that is going to be accelerated by 5G. We really don't know--it's impossible to know. Although Lyft just today positively tweeted at Tesla, FWIW.

May 30, 2018

I think 99% of people who attempted shorting the stock have gotten run over time and time again. Amazes me how consistently high the short-interest is yet up 280% in the last 5 years. I think TSLA is fine, they can raise money many different ways, their cars are badass, and Musk is a champ.

    • 3
May 31, 2018

I'm tagged and one of the dumber apes on this site.

All I find interesting is negative earnings and, negative cashflows over the past 5 years coupled with telling off analysts during an earnings call only to see the stock continue to rise...

Back when I was a teaching assistant, the OG finance professor loved to tout that an investment is only worth the present value of it's future free cash flows. This time may be different where I could rightfully correct him and say an investment is only worth what the next muppet will pay for it.


May 31, 2018

This time may be different where I could rightfully correct him and say an investment is only worth what the next muppet will pay for it.

Yep, market value vs. intrinsic value.

Jun 1, 2018

All I know is, when you have valuations where they are today, everything seems like a risky bet.

    • 1
Jun 1, 2018

I love Elon Musk and the Tesla product is outstanding and revolutionary. Tesla could be a good lotto ticket, but like all long term investments a position in this stock should be measured in the context of size of your portfolio and risk tolerance.

In my opinion the risk of Tesla is that it's a one man show. A lot of the genius of this company is the brainwork of Elon Musk himself, who schedules more of his time for engineering and design work than investor relations. If Elon gets hit by a bus, this company is in trouble. Step back and look at the big picture and you'll see the signs of Elon burning out. He's stretched too thin with so many projects.

I'm totally rooting for Tesla and I think it's a good long term speculative holding. But keep in mind that Elon Musk is a human being, capable of a mental breakdown which would hurt the company's bottom line.

Jun 1, 2018

I like how there's a new narrative that Elon Musk is losing it mentally now that he tweeted out something nice (or understanding) about Trump supporters, as if the mental health questions aren't completely transparent.

Jun 6, 2018

A bit offended that I wasn't tagged, I just made a thread shitting on the stock after the last conference call. :(

Edit: just now seeing that I was actually tagged, disregard the above

My stance hasn't changed on this. I think it's too early to short TSLA given the current environment we're in with domestic equities rallying on non-fundamental shit but I've got some trades in mind with their debt offerings. Until the markets turn or TSLA has a big "ask why, asshole" moment I'd toy with their stock via options, once it (the market) turns it'd be a full on short for me though. I know a handful of fucking smart HF guys that are itching to short everything with Tesla's name on it so if you want in on these trades I'd be preparing now.

Edit 2: totally agree with what you said on Porsche, something to watch for sure

Jun 6, 2018

People have been shitting on Tesla stock on WSO for literally 5 years. It's never the right time to short Elon Musk.

Jun 7, 2018

People have been shitting on Tesla stock on WSO for literally 5 years. It's never the right time to short Elon Musk.

Well that's just a wrong statement. It will eventually be the right time to short TSLA so you can't say "never". That time may even be later this year when the company has $2.2bn in debt coming due while on tract for a ~$1.4b adjusted free cash-burn coupled with a credit rating downgrade and probable inability to further tap the capital markets.

Would you agree that as far as innovators go, Musk is a top 5 (or 10) in the past 20yrs but in terms of being a well-rounded, intelligent businessman the guy has zero fucking business sitting anywhere near the c-suite? Maybe he should focus all of his energy into SpaceX since he's stated publicly that Tesla is just a "side project" for him.

Jun 8, 2018

It was a nice read! It reinforced my belief that in all probability Elon Musk is an entity from another planet.....

Jun 8, 2018

Thanks for the tag. Just wanted to clarify, while I think that the idea behind Tesla is revolutionary and even if the company fails, I'm glad that the idea of EV's has started a "revolution" in a way as electric cars will eventually dominate the market, and that is good for our planet in general. However, my argument is that currently $TSLA is trading at unsustainable levels given their inability to produce cash flow and deliver on production promises, regardless of what investors think about their "potential". It's nothing against the company or Musk, it's just that every company has to generate cash eventually and with the current business model, I think they will run out of money faster than most people think as ramping up car production is clearly not as easy as some people may think. Also, given the upcoming bond payments and other obligations, my thesis is that they will have to tap into the capital markets sooner than later, which will have a detrimental effect on the stock price come 4Q2018 - 1Q2019. In the long run, they may be able to turn it around, but at this point I just don't think that Elon would be the best person to run this company, and at these valuations the stock seems like something I'd short personally. I think eventually the stock will drop into the double digits and a big automaker will swoop in with a takeover bid as the idea and technology behind the company is brilliant.

TLDR: good company doesn't equate to a good stock and would short the hell out of it.

    • 1
Jun 13, 2018

@CuriousCharacter" good shit dude.

Jun 20, 2018

I don't really have a firm position on TSLA.

On the one hand it looks grossly overhyped and potentially overpriced, depending on any investor's time horizon and perceived long term value. Any time people get too enthusiastic about something, there's usually some problem later on because everyone is so willing to overlook the obvious while caught up in their fervor. To be fair, they made electric cars sexy and they're literally building the replacement to the auto industry as we know it. Everyone's all "the technology has been around for a long time and other companies blah blah blah" yeah but TSLA actually is doing it and no one else comes close at this point. Even the coolest of the cool Lamborghini has a concept electric car....but only a concept. So whatever. Good ideas, good products, but what's the real value of the company at this point?

On the other hand, I get a kick out of seeing analysts' heads explode when Musk doesn't do what they want. It's funny to watch some bossy, snot nosed finance drone throw tantrums and get all smarty pants on him, making official declarations and writing letters....he doesn't give a shit. On top of that, he pays no price for not giving a shit and that drives them bonkers, partly because they care about the stock but also partly because it's an affront to the generally overinflated finance ego. So I find it hilarious the same way I find Harpo Marx or Sascha Baron Cohen hilarious. Guy is a billionaire and doesn't need to care about making money tomorrow, next week, or next month. Things get hairy? He cuts a check or riles everyone up to give him more capital. How long the party lasts and what's the outcome? Who knows....but it's fun to watch.

Keep in mind it's easy for me to have these opinions given I have no money on TSLA. So uh, if you've got money on this horse or if you're a rival car company, it's highly likely you'd want to look at it differently.

    • 3
Jun 20, 2018
Jun 27, 2018