Last weekend I watched both the Leaving Neverland documentary about Michael Jackson and the Out for Blood documentary on Elizabeth Holmes and Theranos.
The Theranos documentary was fine -- Theranos is an amazing story and any documentary on it is naturally going to be engaging. My only issue with it was that it was very spare compared to the depth of the Bad Blood book. The documentary worked a bit too hard trying to be too stylized. I would have rather a faster-paced, harder hitting approach. But if you have not read the book, it is definitely worth your time.
On the other hand, the Michael Jackson documentary was simply riveting. I really had zero desire to sit and watch 4 hours on child molesting, but I was totally engrossed. The individuals telling the story were so articulate and honest that I just got sucked in to the story. The whole thing was simply devastating. And as an aside, the B-reel footage used in cut scenes and such was simply beautiful.
Yes, I am like an addict on Tesla but I find the company absolutely fascinating. Books and HBS case studies will be written on this saga some day (a couple are being written right now but seem to be headed for Musk hagiography rather than a real accounting ala business classics like Barbarians at the Gate or Bad Blood).
I still stand by my past thoughts here, where I predicted in advance of results that 3Q2018 was probably going to be Tesla's high water mark, and explained the reasons why. I won't go into them all. There are more than one. But I do want to give an update on one of them, which is the growth and investment story.
First, I want to explain that I have nothing against electric vehicles. I actually have solar panels on my roof and a deposit down on an EV, though it is months away from being available. What Tesla bulls don't really understand about the short position on Tesla is that most of us don't hate on the concept -- I respect them for really bootstrapping the mass EV market into existence. If they were valued in the market at five or even ten billion dollars, you would not hear a peep out of me. But they are valued (depending on the day, it is a volatile stock) between $55 to $65 billion.
The difference in valuation is entirely due to the charisma and relentless promotion by the 21st century's PT Barnum -- Elon Musk. I used to get super excited by Musk as well, until two things happened. One, he committed what I consider outright fraud in bailing out friends and family by getting Tesla to buy out SolarCity when SolarCity was days or weeks from falling apart. And two, he started talking about things I know about and I realized he was totally full of sh*t. That is a common reaction from people I read about Musk -- "I found him totally spellbinding until he was discussing something I am an expert in, and I then realized he was a fraud."
Elon Musk spins great technology visions. Like Popular Mechanics magazine covers from the sixties and seventies (e.g. a flying RV! a mile long blimp will change logging!) he spins exciting visions that geeky males in particular resonate with. Long time readers will know I identify as one of this tribe -- my most lamented two lost products in the marketplace are Omni Magazine and the Firefly TV series. So I see his appeal, but I have also seen his BS -- something I think a lot more people have caught on to after his embarrassing Boring Company tunnel reveal.
Anyway, after a couple thousand words of introduction, here is the update: In my last post linked above, I argued that Tesla is a growth company that is not investing in growth. Sure, it is seeing growth in current quarters due to investments made over the last decade, but there is little evidence it is actually spending money to do anything new. It stopped managing itself like a growth company trying to maintain its first-mover advantage.
Tesla has explicitly chosen to pursue a strategy that needs a TON of capital. Everyone understands, I think, that building a new major automobile franchise takes a ton of investment -- that's why they are not popping up all the time. But Tesla actually has made choices that increase the capital needed even beyond these huge numbers. Specifically, they chose not just to manufacture cars, but to also own the sales and service network and to own the fueling network. Kia was the last major new brand in the US that I can remember, but when it started it relied on 3rd parties to build and operate the dealer/service network and relied on Exxon and Shell to build out and operate the fueling network. So Tesla has pursued a strategy that they need all the capital of Kia and of the Penske auto group and of Exxon. Eek.
And for years, they were valiantly trying to pull it off. They created showrooms in malls and created a new online selling process. They built some service locations but as has been proven of late, not enough. They built a supercharger network. It was a gutsy call that seemed to be paying off.
And then something weird happened. Somewhere in late 2017 or early 2018 they stopped raising capital and greatly slowed down both R&D and capital investment.
They slowed expanding the service network at the very time that their installed base of cars was going up exponentially and they were getting bad press for slow service. Elon Musk promised that Tesla would create its own body shops but nothing has been done on this promise.
They slowed the Supercharger network expansion at the same time their installed base has dramatically increased and at the same time new competitive networks were begun by major players like Volkswagen.
They stopped expanding the Model 3 production line at the same time it was clear the current factory could produce only about 5,000 cars per day (with some quality tradeoffs at that) and Musk continued to promise 10,000 a day
They promised production in China by the end of this year but so far the only investment has been a groundbreaking ceremony in a still muddy field
They promised huge European sales but only just now got European regulatory approval for sales, dragging their feet for some reason on this approval despite lots of new EV competition starting to hit the European market.
They pumped up excitement with new product concepts like the semi and the coupe and the pickup truck but there is no evidence they have a place to build them or even have started to tool up.
Everyone thinks of Tesla as having leadership in battery technology but that is the one area they have actually outsourced, to Panasonic.
Through all of this, through all these huge needs for capital and despite Tesla's souring stock price and fanboy shareholders begging to throw money at the company, they have not raised any capital for a year.
Since my initial post, we have seen a few new pieces of news
Tesla still has not raised capital and in fact faces a $1 billion bond repayment in just over 30 days
Tesla admitted that it has not even started working on a refreshed design for the aging Model S and X, despite increasing EV competition coming at this high end from Audi, Porche, and others. These refreshes should have been started years ago.
In fact, Tesla announced it was cutting back on production of the S and X. Ostensibly this was to focus on the Model 3. Most skeptics think this is BS, and the real reason is falling demand. But it doesn't matter -- growth companies with great access to the capital markets don't make these kinds of tradeoffs. This is further proof that Tesla is no longer managing itself like a growth company. These cuts are particularly troubling because the S and X are where Tesla gets most of its gross margins -- the Model 3 margins are much worse.
Tesla laid off 7% of its work force. Again, this is not the act of a company that is behind in implementing its growth initiatives, growth initiatives that perhaps 80% of its stock market valuation depends on.
Tesla has always had an execution problem, or more rightly an over-promising problem. But it was still actually investing and doing stuff, even if it was disorganized and behind in doing so. Now, however, it is a company valued as an exponential growth company that is no longer managing itself like a growth company. It has billions of investments that are overdue -- in new products, in product refreshes, in the service network, in a second generation supercharger -- that should have been started 2-3 years ago and for which there isn't any major activity even today.
As a disclosure, Tesla stock is one of the most dangerous in the world to trade, either way. You really need to understand it before you trade it and no one really understands it. I have a couple of long-dated put options on Tesla that I consider more of a bar bet than anything else. I also have a couple of cheap short-dated calls as I usually do in the runup to the quarterly Tesla earnings call. Musk is great at the last minute stock pump during earnings call week, and the stock often pops only to fall soon afterwards as people dig into the numbers. But again, these are "investments" that are less than 0.1% of my portfolio.
Postrcript: When I wrote "Tesla is a growth company that is not investing in growth" I was picturing the Jim Cramer cameo in Ironman -- "That's a weapons company that doesn't make any weapons!" Of course it took a work of fiction to see Jim Cramer advocate for the short side. Doubly ironic given Musk sometimes styles himself as the real life Tony Stark.
Lately, I have tried to avoid discussing Tesla and Musk much because I don't want to turn this into a dedicated blog on those two subjects. Also, with all the press (positive and negative) that it gets, another article on Tesla is about as necessary as another article on Stormy Daniels. I even resisted the urge to comment on Musk's childish need to insert himself into the Thai cave rescue story and his subsequent rant on Twitter petulantly calling one member of the rescue team a pedophile because he did not use Musk's submarine. Lol, a submarine for a rescue where one passage was so narrow a diver wearing tanks could not even squeeze through.
My will to avoid Musk and Tesla on this blog collapsed the other day when Musk personally called the employer of one of Tesla's harshest (and I would add most intelligent) critics pseudonymed Montana Skeptic, and threatened to sue the critic and get him fired unless he shut down his criticism. He succeeded, as Montana Skeptic was forced to shut down and issue this statement:
Yesterday, July 23, I decided to cease writing about Tesla (TSLA) here at Seeking Alpha web site. I also deactivated my Twitter account, where I was @MontanaSkeptic1. Here is what prompted those decisions.
Yesterday afternoon, the principal of the family office in which I am employed received a communication from someone purporting to be Elon Musk. Doubtful that Elon Musk could actually be attempting to contact him, my employer asked one of my colleagues to investigate and respond.
My colleague then spoke by phone with Elon Musk (it was indeed him). Mr. Musk complained to my colleague about my writing at Seeking Alpha and on Twitter. Mr. Musk said if I continued to write, he would engage counsel and sue me.
My colleague then spoke with me about the phone call. We both agreed that Mr. Musk’s phone call and threatened lawsuit were actions that would tend to involve our employer in matters in which he has had no part. To avoid such a consequence, I offered to immediately cease writing at Seeking Alpha and to deactivate my Twitter account.
How did Mr. Musk learn my identity, and that of my employer? It appears to me his information came thanks to the doxing efforts of some of his followers on Twitter.
Neither Mr. Musk nor Tesla has ever attempted, at any time, to contact me. Instead, Mr. Musk determined to go directly to my employer.
I do not know what Mr. Musk’s precise complaints are about me. I do not believe he has any valid legal claim, and I would have no trepidation in defending myself vigorously were he to bring such a claim. My response to his threats were simply to protect my employer and preserve my employment.
And so, you might say, Elon Musk has won this round. He has silenced a critic. But he has many, many critics, and he cannot silence them all, and the truth will out.
Folks who have read the book "Bad Blood" about Theranos will recognize this behavior immediately. Musk took advantage of the work of some of his fanboys who bravely doxxed Montana Skeptic and allowed Musk to determine his true identity. Musk is certainly a child (emphasis on "child") of his age, preferring to force critics to shut up rather than respond to them in a reasoned manner. And by the way, where the hell is his board of directors? Just like at Uber, it is time for the grown-ups to come in and take over the visionary but flawed company started by their founder.
I do not have any insider knowledge, so this is pure speculation, but I have worked in a lot of organizations that did insane things to try to reach milestones or goals, and so I think it is educated speculation.
A lot of Tesla's market valuation comes from the prospects of getting a lot of volume with their mid-priced (sort of) Model 3. They need to get production rates up both to reduce costs and to try to get ahead of a huge oncoming rush of competitors entering the BEV space. Last year, they promised to have Model 3 production at 5000 a week by the first of this year, a goal they missed by a mile. So now they have set the expectation that they will be at 5,000 a week production by the end of the second quarter, which is basically this week.
One of the weird things about Tesla is the difficulty in getting good information about its operations, particularly since it is a public company. So many investors, for example, were trying to figure out Model 3 production numbers that an entire cottage industry of VIN analytics and delivery reporting has arisen. But the basic story is that they are not there yet and that's not going to change by the end of the week.
But that does not mean they won't be trying to achieve something that looks like 5,000. In the past Tesla has resorted to the "run-rate" claim, that their run rate for a day or an hour was at such and such much higher number. So that is, I think, what is going to happen this week. Parts and subassemblies are likely being stored up so that in a great burst 714 can be completed in one day or if not that, 30 or so can be completed in an hour so that the company can claim a 5,000 unit weekly run rate was achieved. This is obviously BS -- any bottlenecked process can usually be juiced for a short period of time (examples: Transcontinental Railroad track laying record, Liberty ship build time record) -- but I predict we will see it. I also wouldn't be surprised if you found the numbers for last week were actually below trend due to Tesla hoarding sub-assemblies and parts for huge one-off production push this week.
As an aside, we are coming up to June 30, which for taxpayers can be considered Tesla subsidy day. I have written about this before, but if Tesla can manage its deliveries down a bit in the second quarter, it can extend the taxpayer subsidy of its vehicles another 3 months (the subsidy starts winding down after the 200,000th electric vehicle sold in the US and Telsa is right about there, so much so that rumors are it is sending all its output to Canada this week so it doesn't put them over the US number. Bloomberg estimates that pushing the 200,000th sale from June 30 to July 1 will cost US taxpayers hundreds of millions of dollars:
In my previous post I wrote about Tesla's attempt to prolong the $7,500 U.S. incentive for electric cars by pushing sales into the next quarter. A reader on Twitter who goes by the handle @Smack_Check did the math on how much such an effort would be worth to Tesla's customers: $366 million.
That's the value of additional credits available if Tesla waits just one day (July 1, instead of June 30) to record its 200,000th sale in the U.S. Here are @Smack_Check's fairly conservative assumptions:
Tesla will produce an average of 5,000 cars a week in the third quarter, all models combined (that means about 3,000 Model 3s/week, on average).
Each quarter after that, total weekly production will rise by 1,000.
U.S. sales will account for half of all Tesla sales worldwide during the subsidy period.
Disclosure: I am short Tesla via the ownership of one (1) put option which in my mind constitutes more of a bar bet than an investment. Shorting fan-boy stocks is risky, as is shorting companies the CA legislature is probably scheming right now to bail out somehow with their taxpayer money. If it were not for these two problems I would be all-in on the short like James Bond at the end of Casino Royale holding a straight flush. The odds that Tesla will really be worth $60 billion * (1+i)^10 in ten years is pretty much zero. Also, it's amazing how many of Elizabeth Holme's behaviors at Theranos as documented in Bad Blood one can observe in Musk.
Update: Fixed Tesla current market value, which is closer to $60 billion today.
