Tesla’s “Rounding Error” Of Sales Improvement

Stanphyl Capital’s commentary for the month ended October 31, 2021, discussing their short position in Tesla Inc (NASDAQ:TSLA).

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Q3 2021 hedge fund letters, conferences and more

The Biggest Bubble In Modern Stock Market History

We remain short the biggest bubble in modern stock market history, Tesla Inc. (TSLA), which now has a completely absurd diluted market cap of $1.25 trillion. Perhaps this ridiculousness is best shown graphically, courtesy of @MichalStupavsky and @AlbertBridgeCap; note that both these graphics were created hundreds of billions of dollars ago in Tesla market cap, and when viewing them please keep in mind that Tesla’s share of the world auto market is only around 1.1% (yes, one POINT one percent):

And yet at some point when momentum-riding Tesla bulls (or, for that matter, bears) least expect it, TSLA will recouple with “reality,” and that’s why I continue to maintain a core short position. So here’s “reality”…

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.
Excluding sunsetting emission credit sales Tesla is barely profitable.
Growth in sequential unit demand for Tesla’s cars is at a crawl relative to expectations.
Elon Musk is a pathological liar who under the terms of his SEC settlement cannot deny having committed securities fraud.

Tesla's Q3 Deliveries

In October Tesla reported Q3 deliveries of 241,000 cars, 18,000 more than Wall Street’s “official” consensus and around 11,000 more than the 230,000-delivery “whisper number.” These (and even the entire 40,000-unit gain over Q2) are rounding errors for an auto company trading at even one-tenth of Tesla’s valuation. If in any quarter GM or VW or Toyota sold 2.04 million vehicles instead of 2 million or 1.96 million, no one would pay the slightest bit of attention to the difference. Seeing as Tesla is now being valued at nearly sixteen GMs, it’s time to start looking at its relatively tiny numerical sequential sales growth, rather than Wall Street’s sell-side hype of “percentage off a small base.” In other words, if you want to be valued at a giant multiple of “the big boys,” you should be treated as a big boy.

In fact, a favorite hype story from Tesla fans has been “the China market” and its “record” number of 73,659 Q3 deliveries there. Let’s put this in perspective: this was only around 4000 more cars than in Q1 and only around 11,000 more than in Q2—these are “growth” rounding errors. And that “record” Q3 China quarter gave it just 1.5% of the overall passenger vehicle market and just 11% of the BEV market, and it had so much excess capacity that it exported tens of thousands of cars to Europe. And now in October, Tesla sales in China reportedly fell back to just 12,000 units. Remember when Musk claimed that Tesla’s Chinese domestic demand alone would need multiple factories to satisfy? Ah, the good old days!

One likely way Tesla was able to post an upside surprise in Q3 deliveries was because competitors’ production (and thus inventories) were at the lowest level in decades due to the massive chip shortage, thereby eliminating a number of “Tesla alternatives.” Meanwhile, Tesla had record production because Musk (a notorious “corner-cutter”) was apparently willing to substitute untested, non-auto-grade chips for the more durable chips he couldn’t get; please see my Twitter post about this.

Rounding Error

As for the demand implications of the new U.S. EV tax credit (assuming it passes in its current form—which, by the way, benefits GM & Ford’s union-made cars with a $12,500 per-car credit vs. just $8000 for each Tesla), please see my Twitter thread as to why—relative to Tesla’s insane valuation and its fans’ expectations—it will likely result in just another “rounding error” of sales improvement.

In its Q3 earnings report (released in October), Tesla claimed it made around $1.3 billion in free cash flow (defined as operating cash flow less capex). However, this number appears to be entirely due to working capital adjustments and not from the business itself. Let me explain:

Tesla claimed operating cash flow of around $3.2 billion for the quarter, but this came with the benefit of accounts payable increasing by $702 million, receivables declining by $167 million and accrued liabilities up by $665 million while (detrimentally) prepaid expenses increased by $144 million. Adjusting for that massive net working capital benefit, operating cash flow was only a bit over $1.8 billion and with capex at $1.8 billion it means Tesla’s Q3 free cash flow was essentially zero; i.e., it’s a horrible business.

Also in its Q3 report Tesla claimed it made around $1.45 billion in net income after excluding $279 million of pure-profit emission credit sales (excluded because they’ll almost entirely disappear some time next year when other automakers will have enough EVs of their own), and after adding back a $50 million Bitcoin write-down. However, that earnings number also includes what I estimate to be Tesla’s usual $300 million or so in unsustainably low warranty provisioning, and after adjusting for that and assuming no other fraudulent accounting, Tesla only earned around $1.06/share, which annualizes to $4.24. An auto industry PE multiple of 10x would thus make TSLA worth around $42/share (admittedly, more than the “$0” I once expected), while a “growth multiple” of 20x would value it at $84, which is almost a 93% discount to October’s closing price of $1114. And before you tell me that a 100% premium to the industry’s PE ratio isn’t enough, keep in mind that—as noted earlier—Tesla’s sequential unit growth is an auto industry rounding error. In fact, one could argue that Tesla’s multiple should carry a discount, considering the massive legal and financial liabilities continually generated by its pathologically lying CEO.

Meanwhile Tesla continues to sell (and book cash flow, if not accounting revenue from) its fraudulent & dangerous so-called “Full Self Driving.” In a sane regulatory environment Tesla having done this for five years now would be considered “consumer fraud,” and indeed the regulatory tide may finally be turning, as in August two U.S. Senators demanded an FTC investigation and in October the NHTSA appointed a harsh critic of this deadly product to advise on its regulation. (For all known Tesla deaths see TeslaDeaths.com.) Are major write-downs and refunds on the way, killing the company’s slight “claimed profitability”? Stay tuned!

And remember, the 2021 overview from Guidehouse Insights rates Tesla dead last among autonomous competitors:

Proprietary Battery Technology

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 2022 (as is now expected), their manufacturers will gladly sell them to anyone.

Meanwhile, the quality of the Model Y—is awful, and that car faces current (or imminent) competition from the much better built electric Audi Q4 e-tron, BMW iX3, Mercedes EQA, Volvo XC40 Recharge, Volkswagen ID.4, Ford Mustang Mach E, Nissan Ariya, Hyundai Ioniq 5 and Kia EV6. And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2 and the premium version of Volkswagen’s ID.3 (in Europe), and later this year from the BMW i4, plus multiple local competitors in China.

And in the high-end electric car segment worldwide the Audi e-tron and Porsche Taycan outsell the Models S & X (and the newly updated Tesla models with their dated exteriors and idiotic shifters & steering wheels won’t change this), while the spectacular new Mercedes EQS, Audi e-Tron GT and Lucid Air make the Tesla Model S look like a fast Yugo, while the extremely well reviewed new BMW iX does the same to the Model X.

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, in May Ford formally introduced its terrific new all-electric F-150 Lightning which now has over 150,000 reservations, Rivian’s pick-up has gotten fantastic early reviews, and in January at CES GM will introduce its electric Silverado.

Meanwhile, Tesla quality ranks 30th among 33 brands in the latest J.D. Power dependability survey…

…and second-to-last in the latest Consumer Reports reliability survey:

…while the most recent What Car? survey shows similar results with Tesla finishing #29 out of 31, and now quality is slipping in China.

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, in 2020 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...

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 and stay healthy,

Mark Spiegel

Updated on Nov 1, 2021, 11:19 am

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