Say Hello To Tesla: A Low-Margin, Cyclical Car Company

Stanphyl Capital’s commentary for the month ended May 31, 2023, discussing their short position in Tesla Inc (NASDAQ:TSLA).

In late-May leaked documents revealed that Tesla has conducted an egregious, multi-year cover-up of deadly safety problems caused by its (so-called) “Autopilot/Full Self-Driving” system, as well as sudden unintended acceleration.

I believe this will finally force regulators to demand a massive, multi-billion-dollar recall of both systems and, as importantly, destroy whatever goodwill remains towards this sleazily run company (except, of course, from the diminishing number of hardcore cult members who will deservedly go down with the ship).

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More Margin-Slashing Price Cuts

Meanwhile, Tesla kicked off this quarter with even more worldwide margin-slashing price cuts on top of the massive, margin-destroying cuts it made in Q1. (And those cuts were on top of large cuts made in Q4 2022!)

Yet despite all those cuts, Tesla managed to deliver only around 4% more cars in Q1 than it did in the previous quarter (Q4 2022), and due to the aforementioned price slashing its earnings were atrocious—despite booking a massive amount of emission credit revenue, they were down 23% vs. Q1 2022 and 32% sequentially.

In fact, without a .15/share foreign currency loss improvement vs. Q4 2022, sequential earnings would have been down 46% (!) and revenue was also down sequentially. And as I believe those earnings are artificially high because Tesla deceptively under-amortizes its factories, we should also look at free cash flow, which dropped to just $400 million. In other words, Tesla is no longer a “growth” company unless you define “growth” as declining earnings, declining revenue and declining free cash flow!

Most disturbingly for Tesla bulls, despite the massive price cuts vs. Q4 2022, at 1.8 million units the company is only guiding to 11% more delivery volume than Q4’s 405,000 annualized run-rate of 1.62 million. It’s also only guiding to 2% more production than Q4’s annualized rate of 1.76 million, so where will the “volume savings” to support price cuts come from? And what will Tesla do for its next “growth trick”? Sell cars at a loss? Sell a tiny subcompact beginning in 2025 with an even smaller margin?

Meanwhile the incumbent auto companies can better afford (earnings-wise) to slash prices on their EVs, as those prices can be cross-subsidized by their 95% of volume that comes from highly-profitable ICE vehicles, while Tesla now has nothing that’s “highly profitable.” Here from Automotive News is an excellent example of how OEMs will maintain high overall profitability despite losing money on EVs as they “scale” EV production to Tesla’s cost level:

So while Tesla may “win” an EV price war against other pureplay EV makers, it will lose that war against the incumbent OEMs. Goodbye “story-stock tech company” and hello “low-margin, cyclical car company” in an industry with single-digit PE ratios, and for Tesla that could mean as little as 8x $2.50/share in 2023 GAAP earnings = a stock price of $20/share vs. May’s close of $203.93. (And please don’t lecture me about Tesla’s “energy business,” which in Q1 accounted for just 6.5% of revenue and had just an 11% gross margin and likely nets in the low single digits as it’s an extremely competitive, low-margin industry.)

No Product Edge

Meanwhile, Tesla has objectively lost its “product edge,” with many competing cars now offering comparable or better real-world range, better interiors, similar or faster charging speeds and much better quality. (Tesla ranks near the bottom of Consumer Reports’ reliability survey.) And Tesla is opening its U.S. charging network to everyone (which it already does in much of Europe), eliminating the last reason to buy its now trailing-edge EVs.

In fact, Tesla is likely now the second, third or fourth choice for many EV buyers, and only maintains its volume lead though a short-lived edge in production capacity that will disappear over the next 12 to 36 months as competitors rapidly increase the ability to produce their superior EVs.

Tesla’s poorly-built Model Y faces competition from the much better made (and often just better) electric Hyundai Ioniq 5, Kia EV6, Ford Mustang Mach E, Cadillac Lyriq, Nissan Ariya, Audi Q4 e-tron, BMW iX3, Mercedes EQB, Chevrolet Blazer EV & Equinox EV, Volvo XC-40 Recharge and Polestar 3. And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2, BMW’s i4, Hyundai’s Ioniq 6 and Volkswagen’s ID.7, as well as multiple local competitors in China.

And in the high-end electric car segment worldwide the Porsche Taycan outsells the Model S, while the spectacular new BMW i7, Mercedes EQS and EQE, Audi e-Tron GT and Lucid Air make the Tesla look like a fast Yugo, while the extremely well reviewed new BMW iX, Mercedes EQS SUV and Audi Q8 eTron (as well as multiple new Chinese models) do the same to the Model X.

And oh, the joke of a “pickup truck” Tesla first previewed in 2019 (and still hasn’t shown in production-ready form) won’t be much of “growth engine” either, as by the time it’s in meaningful mass-production in 2024 it will enter a dogfight of a market vs. Ford’s hot-selling all-electric F-150 Lightning and GM’s fantastic 2023 electric Silverado (which already has nearly 200,000 reservations), while Rivian’s pick-up has gotten excellent reviews and Ram will also be out with a great electric truck in 2024.

Tesla is Blackberry

Indeed, for years I’ve said “Tesla is Blackberry” – the maker of a first-generation version of a product that—once the market was proven – would be supplanted into niche obscurity by newer, better versions, and now it’s finally happening.

I believe Musk knows this (hence his recent “Twitter buying distraction”), with VW Group, Hyundai/Kia, Ford, GM, Stellantis, BMW, Mercedes, BYD & other Chinese competitors and, in a few years, Toyota & Honda, stealing Tesla’s share and pounding its stock price into the low double-digits, where it will be valued as “just another car company.”

Meanwhile, the NHTSA has initiated the first of what will likely be multiple recalls of Tesla’s fraudulently named “Full Self Driving,” and in January it was revealed that Elon Musk personally directed its fake, fraudulent promotional video (something extremely similar to what Theranos did with its blood machines and Nikola with its truck), and that the DOJ is investigating him for it and so is the SEC.

The refund liability potential for Tesla for this is in the billions of dollars, and possibly even the tens of billions if a class action lawsuit proves that the cars involved were purchased solely due to the (fallacious) promise of “full self-driving.”

And, of course, there will be a massive “valuation reappraisal” for Tesla’s stock as the world wakes up to the fact that its so-called “autonomy technology” is deadly, trailing-edge garbage that Consumer Reports now ranks just seventh vs. competitors’ systems (behind Ford, GM, Mercedes, BMW, Toyota and Volkswagen) and Guidehouse Insights now rates dead last:

Meanwhile, the NHTSA continues to report a slew of Autopilot-related deaths (which, as noted earlier, Tesla has been doing its best to hid), yet Tesla has sold this trashy software for over six years now:

…and still promotes it on its website via the aforementioned completely fraudulent video! (For all Tesla-related deaths cited in the media—which is likely only a small fraction of those that have occurred—please see TeslaDeaths.com.)

Want to see another Elon Musk/Tesla deception summarized in a simple bar graph? In this recent Consumer Reports test, note which of these cars never comes close—in any environmental conditions—to meeting its claimed EPA range:

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, even if Tesla makes some of its own, other manufacturers will gladly sell them to anyone, and BMW has already announced it will buy them from CATL and EVE.