Tesla Will Recouple With Reality When The Bulls Least Expect It

By Jacob Wolinsky. Originally published at ValueWalk.

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

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Tesla’s Absurd Diluted Market Cap

We remain short the biggest bubble in modern stock market history, Tesla Inc. (TSLA), which has a completely absurd diluted market cap of almost $1.2 trillion despite a steadily sliding share of the world’s EV market and a share of the overall auto market that’s only around 1.1% (yes, one POINT one percent). 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 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.

Many Tesla bulls sincerely believe that ten years from now the company will be twice the size of Volkswagen or Toyota, thereby selling around 21 million cars a year (up from the current one million). To illustrate how utterly clueless this is, going from a million cars a year today to 21 million in ten years means Tesla would have to add a brand new 500,000 car/year factory with sold out production EVERY single quarter for ten years!

To do this even in twenty years would require adding a new factory with sold out production every six months, at which point Tesla would then be approximately twice the size of Toyota (current market cap: $257 billion) or Volkswagen (current market cap: $130 billion), making a Tesla twenty times its current size worth perhaps $500 billion in twenty years. If you discount that $500 billion back by 15% a year (which is likely a much smaller return than any Tesla bull expects) for twenty years, you get a net present value for Tesla stock of approximately $30 a share, down over 97% from 2021’s closing price. That’s why when idiot Tesla bulls look at the company’s current large trailing percentage growth from its recent tiny base and extrapolate that into the future they’re being, well… idiot Tesla bulls!

Q3 Deliveries

In October Tesla reported Q3 deliveries of 241,000 cars, a 40,000-unit gain over Q2 that’s a rounding error for an auto company trading at even one-tenth of Tesla’s valuation. (For Q4 the gain is expected to be another 45-50,000.) 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 over fourteen GMs, it’s time (as noted above) 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.

Perhaps the biggest reason Tesla has recently been able to post marginally increasing sequential quarterly deliveries is because competitors’ production (and thus inventories) are at the lowest level in decades due to the massive chip shortage, thereby eliminating a number of “Tesla alternatives.” Meanwhile, Tesla is enjoying record production because Musk (a notorious “corner-cutter”) is apparently willing to substitute untested, non-auto-grade chips for the more durable chips he can’t get; please see my Twitter post about this.

A favorite hype story from Tesla bulls 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—again, these are “growth” rounding errors. (Thanks to drastically slashed production from chip-starved competitors, look for around 30,000 more in Q4.) 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. Remember when Musk claimed that Tesla’s Chinese domestic demand alone would need multiple factories to satisfy? Ah, the good old days!

Meanwhile, Tesla remains a lousy business. In its Q3 earnings report the company 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, and if you deduct stock comp (a non-cash item paid through share dilution) it was around negative $500 million.

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 a 92% discount to December’s closing price of around $1057. 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.

Full Self Driving

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 here.) Are major write-downs and refunds on the way, killing the company’s slight “claimed profitability”? Stay tuned!

Meanwhile, Guidehouse Insights continues to rate Tesla dead last among autonomous competitors:

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), even if Tesla makes some of its own, other manufacturers will gladly sell them to anyone.

Tesla Build Quality Remains Awful

Meanwhile, Tesla build quality remains awful (it ranks second-to-last in the latest Consumer Reports reliability survey and in the bottom 10% of the latest J.D. Power survey) and its worst-rated Model Y faces current (or imminent) competition from the much better built electric Audi Q4 e-tron, BMW iX3, Mercedes EQB, 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, the great new BMW i4 and the premium version of Volkswagen’s ID.3 (in Europe), plus multiple local competitors in China.

And in the high-end electric car segment worldwide the Audi e-tron (substantially improved for 2022!) 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, Ford’s terrific 2022 all-electric F-150 Lightning now has nearly 200,000 retail reservations (plus many more fleet reservations), Rivian’s pick-up has gotten fantastic early reviews, and in January GM will introduce its electric Silverado.

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.