Monday, December 4, 2017

The Short Argument Against Tesla

Mr. Chanos was taken to the cleaners by Mr. Musk on SolarCity, had Tesla not bought it, SCTY was on its way to bankruptcy court. We have quite a few posts on the bad blood between the two, use the 'Search Blog' box search term SCTY if interested.

Following up on Friday's "$300 Looks Like an Important Line For Tesla's Stock (TSLA)".
TSLA $302.87 Down $3.66, last (1.19%)

From ZeroHedge, November 14:

Jim Chanos Adds To Tesla Short, Sees Musk Stepping Down
The ongoing vendetta between the scourge of Enron, Jim Chanos, and Elon Musk escalated when the Kynikos Associates founder said he has been adding to his Tesla short position throughout the year even as the company’s shares soared to record highs. Speaking at the Reuters Global Investment 2018 Outlook Summit, Chanos - who first disclosed his TSLA short last May - said that he expected Elon Musk to step down from his position by 2020 to focus on his private rocketship company SpaceX as competitors such as BMW and Porsche expand their lines of luxury electric vehicles.

“Obviously this is not being valued as a car company, it’s being valued on Musk ... he’s the reason people own the stock,” Chanos said.

“Put it this way. If you wouldn’t be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.”

He said the company is burning more than $1 billion in cash each quarter and will have a harder time tapping the capital markets if and when Musk leaves

Still, while Chanos may have had a large enough balance sheet to avoid a short squeeze, others have been less fortunate, and as a result Tesla shares are up 44% for the year to date, briefly rising above General Motors in market cap, as countless shorts have been margined out despite Tesla's chronic - and often shocking - cash burn, and despite increasingly louder concerns that Tesla will be unable to deliver on its aggressive Model 3 timetable. Just last week, Tesla reported its largest-ever quarterly loss, unveiled it had burned a record $16 million per day...

 ....and pushed back its target of volume production of its new Model 3 sedan by three months. The company said it now expects to build 5,000 Model 3s per week by late in the first quarter of 2018 from its original target date of December. And yet, despite the production delays or perhaps due to them, the company has been a veritable widowmaker for shorts, with losses among funds that bet on its decline totaling more than $4 billion this year, according to S3 Partners and Reuters.
To be sure, Chanos is not alone in shorting TSLA, and some other notable skeptics who have likewise bet on Tesla's demise include:
  • Mark Yusko, founder and CIO at Morgan Creek Capital Management.
  • Mark Spiegel of Stanphyl Capital Management.
  • David Rocker, formerly of Rocker Partners.
  • Anton Wahlman, former stock analyst who now writes about the auto industry (he said he currently holds no position on Tesla)
Their short thesis is roughly captured by the following 7 points:

1. Negative Cash Flows
“If you can’t make money selling a $100,000 car to rich people, how are you going to make money selling a $45,000 car to normal people?” Rocker told The Times. He was referring to the upcoming mass-market Model 3. “I’m saying they’re going to lose money on every Model 3 they build and sell,” Spiegel said. Based on Tesla’s Q4 2016 earnings report, he figured the combined average selling price for non-leased Model S and X is about $104,000 and the combined average cost of building them about $82,000.

2. Competition from the Big Guys
Electric vehicles are still only a tiny fraction of total new vehicle sales in the US. Tesla sold about half of them. In March, according to Autodata, Tesla sold 4,050 vehicles in the US, similar to Porsche. All automakers combined sold 1.56 million new vehicles. This gave Tesla a market share of 0.26%. "Tesla faces a formidable set of competitors, and they’re coming in with guns blazing,” Wahlman told The Times. “Once the market is flooded with electric vehicles from manufacturers who can cross-subsidize them with profits from their conventional cars, somewhere around 2020 or 2021, Tesla will be driven into bankruptcy,” Spiegel said.

3. Tesla’s vanishing tax credits
The federal tax credit of $7,500 that EV buyers currently get is limited to 200,000 vehicles for each automaker. Once that automaker hits that point, tax credits are reduced and then phased out. Of all automakers, Tesla is closest to the 200,000 mark. Under its current production goals, the tax credits for its cars could start declining in 2018. This would give competitors, whose customers still get the full tax credit, a major advantage. About 370,000 folks put down a refundable $1,000 deposit on Tesla’s Model 3, perhaps figuring they’d get the $7,500 tax credit. But as it stands, many won’t. Rocker thinks that this is going to be an issue. The refundable deposit “commits them to nothing,” he said. Those that don’t get the tax credit may just ask for their money back and buy an EV that is still eligible for the credit....MORE
We also have a couple hundred posts on Tesla going back to the pre-IPO days if interested.