Coyote Blog

So as of the morning of 1/17 when I started writing this, the enterprise value of Tesla (market value of its debt and equity) was somewhere around $110 billion.  I can't even pretend to explain how a company that over 10+ years has never made an annual profit and which produced less than 400,000 vehicles as this sort of valuation (Volkswagen, which has about the same equity market value, makes about 11 million vehicles a year).  Tesla has an enterprise value of $300,000 per annual car produced (each of which, on average, lost money for them last year).

I don't have the energy to repeat my concerns on Tesla, but I do want to give a few updates from the last 12 months

• Tesla is not seeing a lot of organic growth.  I know that seems an odd statement given that deliveries have been up the last few quarters (though even this growth has been pretty modest for a company with such a large valuation growth premium).  In retail there is a useful concept called "same store sales".  Revenue might be growing due to addition of new store locations, but what is happening in the core stores you already have?  In this case, one can say that Tesla's same stores, or more accurately "same product-geography sales" have been disappointing.  They enter new markets with a big splash and a lot of pent up demand -- Model 3 US, then Europe, then UK left hand drive, etc.  But in each case, after 2-3 quarters, lacking some specific one-time boost, deliveries begin falling.  Deliveries fell in the US the last 2 quarters.   Apparently they fell in CA last quarter.   They fell in strong Tesla markets like Norway the last quarter.  They are falling in most of Europe.  Tesla is eeking out small increments of growth each quarter by one time effects -- first the introduction of the model 3 in Europe, then in the 3rd quarter in the UK, then in the 4th quarter with a huge burst of sales in the Netherlands as EV subsidies in that country expired at end of year.  Tesla as a whole has some growth (though still more modest than you might guess from the hype) but look at each constituent market and you see a more disturbing story.
• The model 3 has cannibalized Tesla's high end, high margin Model S and X products.  In a post last year, I criticized Tesla for under-investing in refreshing the Model S and X, whose designs were getting long in the tooth.  Today, it's becoming increasingly clear that Tesla is on a path to abandoning these products, which have already seen steady sales declines as they are cannibalized by the less expensive model 3.  The problem with this approach is that it is creating a mix shift from higher price/margin to lower price/margin products.  Even as deliveries go up, revenues are not rising nearly as fast and there is downward pressure on gross margins.
• Given the above two points, I was as surprised as most people that Tesla reported a profit for 3Q2019.  It made almost no sense that they produced more vehicles but with essentially unchanged revenues and had net income go up.  I am still tremendously skeptical about Tesla's financial statements but for what its worth, they seeming to be getting them past the auditors.
• My guess is that they will show a profit of 4Q2019 but probably still a loss for the year, but if anyone can stretch 2019 into a small positive net income gain, Tesla will find a way.  Maybe a massive sale of emissions credits or some sort of one-time supplier rebate or recognition of self-driving revenues.  No matter what, though, 1Q2020 almost has to be a disaster.  Tesla fans seem to think that China will fill in the hole, but I believe Tesla is exaggerating the ability of its new Shanghai plant to produce in volume, while the Chinese auto market is pretty sick right now anyway.
• Tesla still does a lot of counter-productive stuff to buff up quarterly numbers.  Just one example, I noticed around Dec. 20 that two Tesla showrooms in Scottsdale had zero display vehicles on the floor.  I was told that this is now a common Tesla practice to sell out all of its display inventory each quarter to show a few extra delivery numbers (with 3 cars each at 200 showrooms this is maybe another 600 deliveries or about 0.5% of quarterly sales).  This strikes me as tremendously short-sited.  They went for weeks in the busy holiday shopping season without any demonstration models in their stores just to increase quarterly deliveries by maybe a fraction of a percent.  Elon Musk and Tesla seem to expend an inordinate amount of energy trying to get short-term boosts in the stock price.  The only other person who spends as much time on twitter pumping stock prices is Donald Trump, who IMO shares a number of personality traits with Musk.
• The market apparently does not care one bit that the Tesla makes promise after promise that are not only broken, but entirely forgotten.  The Semi, the roadster, battery swap, a million robotaxis by 2020, a thousand solar roofs per week in 2019 -- all these promises and more were introduced to much fanfare and stock pumps and then promptly forgotten by all.  Each new promise that comes out, no matter how unbelievable it smells, is treated by the stock market as an occasion to run the stock up another 20 points.
• The Tesla acquisition of SolarCity was at least as corrupt as I thought it was at the time it happened.  Recent disclosures in the shareholder suit challenging the SolarCity acquisition as a bailout of the extended Musk family have confirmed that a) SolarCity was on the verge of bankruptcy when Tesla stepped in; b) despite the shaky financials and no other interested parties, Tesla paid a premium for the company with almost no negotiation and c) for at least 2 years afterwards Tesla was essentially shutting down that business, doing fewer installations every quarter and closing sales locations.  Then, in the same week that Musk was deposed in the shareholder suit, Tesla began announcing new solar roof initiatives and making more Musk-like promises of huge future growth.  I am convinced this activity is a sham meant to give Musk the ability to truthfully testify that Tesla is committed to the solar business, and that all this activity will go the way of the Tesla Semi and battery swap once the trial is over.  From recent prototypes it does not appear that Tesla has solved the long-standing installation issues of solar shingles and that at the currently-promised pricing Tesla will lose thousands on every installation.
• Tesla's biggest mistake IMO is still the lack of a 3rd party, well-capitalized dealer network.  Tesla is the only major auto manufacturer that refuses to participate in JD Power satisfaction and reliability surveys, so we don't have super-good satisfaction data, but the little data we have seems to point to massive reliability and service problems with Tesla cars.  I had thought that 2019 would be the year that such problems would hit the mainstream press, but apparently not.  Part of the reason Tesla is able to hide these problems is the codependent relationship they have with Tesla owners.  Tesla message boards are full of posts that begin "I love my Tesla, but..." and then go on for 3 pages describing product defects and the impossibility of getting service.  From time to time Musk will promise huge new service investments -- particularly just after a blue check mark complains on Twitter -- but all evidence is that they greatly grew their installed based of cars in 2019 with only tiny investments in their service network.
• I was mostly happy that Vern Unsworth lost his libel suit against Musk for calling him a pedo.  Look, Musk acted like a totally entitled pr*ck in the whole affair, but there are important reasons to keep a very very high bar on libel.  For $TSLAQ fans who are now mad at me for giving even this slight accommodation to Musk, imagine that the US had a much lower bar for libel suits.  Which thin-skinned billionaire CEO of an overvalued automobile manufacturer would likely be first to take advantage of this regime and weaponize the courts against his critics?

Postscript:  I will add a note that people seem unable to separate the company's valuation from how much they like the products.  Certainly Apple has wonderful products AND is a very valuable company.  But this does not have to be the case.  WeWork rents beautiful offices -- heck, it turns out they are giving me $10 of office for every $5 I pay, what's not to love? But it was and still is overvalued as a company because it has no reasonable plan to ever make money.  So saying that Tesla makes great cars or Tesla cars suck are both largely irrelevant statements to my thinking about whether $tsla stock is overvalued.  My personal view is Tesla could have been a nice niche automaker and is probably worth $10-$20 billion -- at which price they might get purchased by another major auto maker.

Postscript #2: I have explicitly left out discussion of Tesla autopilot.  There is no question it has been overpromised and oversold, but I can't quite form an opinion on whether it is safe.  I personally would not trust my own safety to a self-driving technology that did not include LIDAR -- there are just too many ways for a vision-only system to make mistakes.  Tesla AP clearly has made mistakes and hurt and killed people.  Alert drivers make mistakes that hurt and kill people.  I don't know which is more prevalent, though one can be suspicious of Tesla when it does not really make it easy to analyze the data on this and produces clearly flawed analyses.   I certainly don't trust Tesla AP just because of the aura of Elon Musk supposedly being a genius, because I am pretty certain he is not  (things like the hyperloop I DO have a lot of background to understand and its a joke).  As a libertarian I don't want to see the government restricting the hell out of self-driving development and progress with stacks of regulations, and I refuse to call for such regulation just because it would help the value of a Tesla short position.  As should now be clear, I have limited knowledge and mixed feelings on the topic, so I avoided it in the main body of the post.