Image Courtesy: Sheeraz Raza for ValueWalk, taken at Westfield Mall, London.
Stanphyl Capital January 2020 hedge fund letter to traders on why Tesla Inc. (NASDAQ:TSLA) is quiet an proper short and going to be beaten by competition from the Audi e tron. Full letter may presumably also be designate in PDF at the backside of this submit.
Mates and Fellow Merchants:
Despite our greatly reduced (in December) Tesla short sigh, that stock damage us all yet again this month because it became as soon as up one other 56% in January, and roughly half of this month’s unfavourable performance became as soon as ensuing from a well-known hit we took on January 2021 TSLA $690 calls that I’d shorted in the $17s assist in 2018 when the stock became as soon as in the low $300s. Coming into this month they comprised factual below 5% of the hedge fund and had been priced at $14, and when the stock rocketed in early January I carried out them out at $25 to $35 (they carried out the month at $108!), and the majority of this month’s anguish became as soon as completed. Now our ultimate TSLA short sigh is straight equity that currently comprises round 5% of the fund.
I continuously search files from myself what I’ve realized from this disastrous Tesla expertise, and how I’d address it otherwise in the waste. Let me first utter that earlier than I opened this fund I made many avoidable mistakes in the stock market; if truth be told, it became as soon as learning from a lengthy litany of “the unprecedented investing mistake suspects” (must you’ve been in the markets lengthy ample, you’ve positively realized from moderately a great deal of them your self), that gave me the self perception to open this fund in 2011.
That acknowledged, Tesla, in inequity to any other company I’ve ever seen, tests every box for a tidy short sigh: a primarily frightful commerce in a capital intensive, vastly competitive commerce with a bubble-stock valuation and a pathologically mendacity CEO committing (and so a long way getting away with) a multitude of fraud in terrifying daylight. In other words, you give me 1000 TSLAs and for 999 of them a transient sigh will work superbly.
Stanphyl is a concentrated fund (that’s why I won’t address more than 10% of any outside worth investor’s portfolio, even supposing approximately 80% of my money is in the fund) that can as soon as in a while trudge as mighty as 1/3 of the portfolio in a single equity sigh. When I look something that I sigh would work 999 times out of 1000 I don’t dimension the sigh as if it has, utter, “a 70% probability of working.” As a exchange I dimension it as if it no longer working may presumably presumably be the equivalent of getting hit by “a stock market meteor” (which admittedly has decrease odds than getting hit by a proper meteor).
You give me 1000 companies with the profile of Tesla to short and collectively we’ll ranking the largest and most successful fund in the historic past of investing, however unfortunately (and even “luckily”) there aren’t 1000 short candidates with the profile of Tesla—if truth be told, there aren’t even two. From a excellent standpoint then, Tesla’s “rarity” capacity it’s extraordinarily no longer truly we’d ever all yet again dimension a transient sigh in a identical manner (our customary dimension for a transient sigh is 2% to 5%)—no longer ensuing from “this one didn’t work,” however ensuing from we’ll likely never all yet again look an organization as crazy as Tesla.
As for Tesla, I’ll now drag away it as a 5% sigh until I learn earlier than the market does (legally, unnecessary to suppose!) that the feds at final slapped a pair of cuffs on Musk. Forward of stumbling at some level of this company I had a lengthy file of distinctive outperformance, and I prefer that file assist.
In that vein, as you may presumably presumably presumably capture from final month’s letter, in unhurried December I took the fund assist to its roots to focal level totally on discovering deep-worth microcap/nanocap lengthy positions and (as I won’t alter our definition of “worth stocks” to suit a global asset bubble) preserving more money if significant. I covered our nonTesla equity shorts for as lengthy as the Fed is printing money; when the money-printing stops we’ll short other stocks all yet again, however as I wrote final month, lawful now that’s like playing poker against a man with a chipmaking machine on his lap—he can name every bet a transient-vendor makes and I don’t have to “play against the house.”
And now for the fund’s positions…
As renowned above, we stay short Tesla Inc. (TSLA), which I quiet care for in mind to be the largest single stock bubble on this total bubble market. The core capabilities of our Tesla short thesis are:
- Tesla has no “moat” of any style; i.e., nothing meaningfully proprietary by job of electrical car expertise, while present automakers—in inequity to Tesla—ranking a a protracted time-lengthy “expertise moat” of shimmering the vogue to mass-device, distribute and restore excessive-quality cars continuously and profitably, as well to the capacity to subsidize losses on electrical cars with earnings from their venerable cars.
- By mid-to-unhurried 2020 Tesla and its abominable stability sheet will return to losing money.
- Tesla is now a “busted insist story”; Q4 income became as soon as roughly flat 300 and sixty five days-over-300 and sixty five days while unit search files from for its cars is ultimate being maintained by device of continual brand reductions and expiring tax incentives.
- Elon Musk is a securities fraud-committing pathological liar.
Tesla tax credit
In January Tesla reported $105 million in earnings for the fourth quarter of 2019 (entirely from the sale of regulatory emissions credit, no longer from a self-sustaining auto commerce), which became as soon as down 25% from Q4 2018, while income became as soon as up factual 2% and the burly-300 and sixty five days loss became as soon as $862 million. If we compare the 2d half of 2019 to the 2d half of 2018, Tesla income fell 3% and ranking earnings fell 45%. Yet somewhere available in the market’s a mass of idiots bidding this stock to the moon ensuing from they mediate it’s a “hypergrowth” company! Liam Denning at Bloomberg does a amazing job of pondering that absurdity.
Moreover, Tesla’s “earnings” are in overall inflated by at the least $200 million per quarter due its huge ongoing warranty fraud, so if truth be told the corporate likely lost money in Q4; right here’s my Twitter thread explaining about a of that and right here’s a amazing Seeking Alpha article explaining the remainder. Within the period in-between we’ll ranking to look at the 10-Ample in about a weeks to learn what other scammery Tesla pulled in the quarter; relaxation assured there became as soon as masses.
Fraud at Tesla?
Yet even with all that fraud, right here (courtesy of my buddy @Montana_Skeptic) is a big historic chart of Tesla’s earnings music file despite billions of bucks in public subsidies:
And courtesy of @TeslaCharts, right here’s a chart of Tesla’s income “hypergrowth”:
As for the nonsensical earnings conference name, this quote from Musk about when so-referred to as “Autopilot” will be “feature total” can ranking been the spotlight:
“feature total factual capacity prefer it has some likelihood of going from your property to work let’s utter without a interventions. So, that’s — it doesn’t mean the capabilities are working successfully, alternatively it capacity it has above zero likelihood. So I mediate that’s attempting like maybe it’s going to be a pair of months from now.”
That insane assertion prefaces Fraud-Boy’s want to acknowledge approximately $500 million of non-money (it’s already on the stability sheet) deferred income from its fraudulently named “Full Self-Utilizing” (the capabilities of which provide nothing of the style), thereby turning a future money-losing quarter (likely Q2 2020) into one showing paper earnings. Within the period in-between, God ultimate knows what number of more of us this monstrosity unleashed on public roads will waste.
Predominant competition from the Audi e-tron
For these of you shopping for a resumption of insist from Tesla’s upcoming Mannequin Y when it launches in March, that car will every vastly cannibalize sales of the Mannequin 3 sedan and (later this 300 and sixty five days and in 2021) face superior competition from the mighty nicer electrical Audi Q4 e–tron, BMW iX3, Mercedes EQB, Volvo XC40 and Volkswagen ID Crozz, while more brand efficient and readily available now are the excellent unique all-electrical Hyundai Kona and Kia Niro, extraordinarily successfully reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of below $30,000 inclusive of the $7500 U.S. tax credit. Within the period in-between, the Mannequin 3 can ranking terrific verbalize “sedan competition” later this 300 and sixty five days from Volvo’s comely unique Polestar 2, the BMW i4 and the highest payment model of Volkswagen’s ID.3.
Chinese language cars
And must you sigh China is the secret to the resumption of Tesla’s insist, let’s effect that market in perspective: sooner than a contemporary 10% VAT exemption Tesla became as soon as selling round 30,000 Mannequin 3s a 300 and sixty five days there, and “the story” is that avoiding the 15% tariff and 10% VAT, plus a $3600 EV incentive that likely expires next 300 and sixty five days will allow it to promote rather more. Nonetheless, the rule of thumb for the flexibleness of vehicle pricing is that every 1% brand sever outcomes in a sales extend of up to 2.4%.
If we capture a 2.4x “elasticity multiplier,” domestically produced Mannequin 3s which may presumably presumably be 33% more cost effective would lead to annual sales of factual 54,000 (33% x 2.4 = 79% more than the outdated 30,000), meaning Tesla’s unique Chinese language manufacturing facility may presumably presumably be a huge money-loser by running at factual unprejudiced a itsy-bitsy more than 1/3 of its preliminary 150,000-unit annual skill and 1/10th of the skill it will ranking two years from now.
This ensures hugely missed insist targets and it is “insist” (or more accurately, the fantasy of insist) that drives Tesla’s stock brand. And right here’s a huge overview of what a dogfight the Chinese language EV market has change into.
Within the period in-between, sales of Tesla’s absolute best-margin cars (the Models S&X) will be down by roughly 50% worldwide this 300 and sixty five days vs. their 2018 peak, ensuing from cannibalization from the more brand efficient Mannequin 3 and verbalize highend competition (namely in Europe and China) from the Audi e–tron, Jaguar I–Tempo, Mercedes EQC and Porsche Taycan, with a number of extra electrical Audis, Mercedes and Porsches to apply, many at starting prices severely below these of the excessive-halt Teslas. (Thought the links below for more particulars.)
Audi e-tron vs Tesla consumer reports
Within the period in-between, Tesla has the most executive departures I’ve ever seen from any company; right here’s the astonishing burly checklist of escapees. These of us aren’t leaving ensuing from things are going huge (and even passably) at Tesla; moderately, they’re likely leaving ensuing from Musk is either an outright criminal or the arena’s largest jerk to work for (or every). In January Aaron Greenspan of @PlainSite published a significant treatise on the lengthy historic past of Tesla fraud; please learn it!
In Also can Consumer Studies fully eviscerated the safety of Tesla’s so-referred to as “Autopilot” machine; if truth be told, Teslas ranking rather more pro rata (i.e., relative to the amount offered) lethal incidents than other associated unique luxurious cars; right here’s a link to those which ranking been made public. Within the period in-between Consumer Myth’s annual auto reliability view ranks Tesla 23rd out of 30 brands (and that’s with many stockholder/owners positively underreporting their problems—the proper quantity is quite no doubt mighty worse), and the amount of complaints of all kinds against the corporate continues to escalate– there for the time being are over 800 alongside side one proving blatant fraud by Musk in the SolarCity buyout (must you should have to be in actuality entertained, learn his deposition!), an allegation that unsafe door handles prompted a Tesla driver to burn to death in his car, and proof that the company secretly rolled assist battery performance without compensating owners.
So right here is Tesla’s competition in cars reminiscent of the Audi e-tron (allege: these links are steadily updated)…
And in China the Audi e-tron, Volkswagen and others…
So in summary, Tesla is set to face a huge onslaught of competition with a market cap higher than Volkswagen’s or Ford’s and GM’s blended, despite selling round 400,000 cars a 300 and sixty five days while VW sells 10.5 million and Ford and GM promote 6 million and eight million vehicles respectively, producing billions of bucks in annual profit.
Thus, this money-burning Musk arrogance challenge is worth vastly lower than its roughly $124 billion enterprise worth and—ensuing from over $30 billion in debt, purchase and rent duties— may presumably at final be worth “zero.”
Thanks and regards,
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