#teslamodel3

Tesla: Catching a falling knife

Tesla is breaking down. So many discipled pundits are looking at the company stock falling into “good value” territory. Good value is always relative. Sadly buying Tesla now is catching a falling knife.

It reminds CM of a time when Fuji Film dominated flat screen TV TAC films. It held 40% market share. Yet the market was shrinking and new competitor products were able to combine two films in one, dispensing with the need for TAC altogether. Yet analysts would crow at 40%. CM said 40% of soon to be nothing will be nothing.

Tesla’s valuation at $180 is ridiculously high compared to other auto manufacturers. Tesla still misses the two most important ingredients to profitable car companies – production efficiency and distribution. It has neither the first and has chopped back on the last. Digital dealerships are just not feasible especially given the nightmare quality or Tesla cars.

Big money is dumping. T Rowe Price has exited. fidelity following suit. Musk’s musings now carry little weight. Promises of stupendous Q2 volumes and making cars with ridiculously short ranges for Canadians to get the benefit of subsidies smacks of desperation.

This company, if it could, is running on the smell of an oily rag. The inability to rally back up above $200 with any conviction is showing the rattled confidence of existing holders. It’s like finding out you’ve been given the employee of the month award from your boss and you’re the only staff member. It carries no significance.

CM holds to the $28 fair value price from the 2017 report. That is CM’s optimistic scenario. So much for funding secured at $420.

Ding dong the switch is dead

Morgan Stanley has finally lowered its bearish scenario on Tesla from $97 to $10. CM wrote in October 2017 that the shares based on production of 500,000 vehicles was worth no more than $28 (refer to report page 5). That was based on rosy scenarios. Sadly CM thinks Tesla will be bought for a song by the Chinese. Maybe $4.20 a share instead of $420 “funding secured” levels.

The stock breached $200 yesterday for the first time since late 2016.

Morgan Stanley analyst, Adam Jonas, has still kept its base case scenario at $230 per share. His bull case is $391.

Where is the conviction? To drop a bear case target by 90% must surely mean the base case is far lower than presently assumed.

Jonas must assume the bear case is actually the base case. Sell side brokers love to hide behind scenario analysis to cop out having to get off the fence. His compliance department probably prevents him from realizing $10 is his true heart.

Tesla was always playing in a market that it had no prior experience. It is not to say the products didn’t have promise. The problem was the execution. Too much senior management turnover, missed targets, poor quality and too many Tweets from Musk.

The amount of bad press arising from a lack of service centers has driven customers to moan on social media at its amateur approach. The fragile dreams of being an early adopter are being shattered. Cash burn remains high and deliveries remain low. Some pundits think Tesla orders are under real pressure in 2Q 2019.

The recent all share deal with Maxwell Technologies has seen those holders -20% since the transaction a few weeks ago. CM argued how a company with such revolutionary technology could sell itself for all shares in a debt-ridden loss making like Tesla? If the technology was of real value PE funds would have snapped it up or at the very least made a bid in cash. That none was made speaks volumes about what was bought.

All of the arguments hold true in the above link, “Tesla – 30 reasons why Tesla will be a bug on a windshield

Tesla below $200 after a successful cap raise is not a good sign. It’s the faithful slowly tipping out. Await another imaginary Musk-inspired growth engine to be announced shortly to try prop up the stock price. Yet the momentum will continue to sink. The market is losing confidence in Musk. The 1Q results were diabolically bad.

Major holder T Rowe Price has stampeded out the door. The stock is too risky. Musk is a brilliant salesman but he has bitten off more than he can chew.

CM always thought that Toyota selling its Tesla stake was a major sign. Acknowledging that under the hood the company possessed no technology that Toyota didn’t already own.

Watch the free fall. The Tesla stock will be below $100 by the year end.

(CM does not hold Tesla stock)

Greatest Corporate Showman on Earth

Tesla’s 1Q 2019 results were dreadful. CM has long held that Tesla is a basket case. The ever charismatic Elon Musk is trying to fan the flames of his company with dying embers. The question is where do we start on this diabolical 1Q report?

1. Musk started off with cash to speak to solvency. Tesla talks to $2.2bn in cash and equivalents. Down $1.5b, partly due to a $920m convertible repayment. Don’t forget Tesla has $6.5bn in recourse debt and $3.5bn in non-recourse debt. It has payables and accrued liabilities of another $5.5bn offset with receivables of just over $1bn.

2. Model S/X deliveries fell from 21,067 in 1Q 2018 to 12,091 in 1Q 2019. That’s -56% at the high margin premium car end. Musk claimed it was due to demand pull forward with a reduction in tax credits. Well he just proved that without credits, demand suffers appreciably.

Model 3 production was 3% higher on the quarter but deliveries were 20% lower. Note customer deposits total $768m, marginally down on the previous quarter. If Tesla starts to implode, customers have a right to get those credits back. Residual values aren’t holding as we discuss in pt.5.

3. Solar deployed -38% year on year

4. (Battery) Storage deployed -39%YoY

5. CM made it clear in point 11 of the 30 reasons why Tesla will be a bug on a windshield report,

The Tesla Residual Value Guarantee, while well intentioned carried risks that crucified the leasing arms of the Big 3. After the tech bubble collapsed at the turn of the century, do you remember the ‘Keep America Rolling’ programme, which was all about free financing for five years? While sales were helped along nicely, the reality was it stored up pain…Goldberg & Hegde’s Residual Value Risk and Insurance study in 2009 suggested on average 92% of cars returned to leasing companies recorded losses on return of up to 12%. Any company can guarantee the price of its used product in theory, the question is whether used car buyers will be willing to pay for it. Sadly Tesla does not get a say in what the consumer will be willing to pay.”

In the 1Q 2019 result, Musk admits that Tesla suffered $121m impairment on residual value guarantees (RVG). Is it any wonder they stopped this scheme. Now it’s payback time. There are $480mn worth of RVGs still on the balance sheet that are unlikely to have been marked to market values.

6. Level 5 autonomous driving is a pipe dream in the near term. 20+ years away. A fleet of Tesla taxis is an even bigger thought bubble. Regulation will put that on the back burner. The current level 2 systems have already shown significant short comings given the numerous beta testing deaths at the wheel of the Tesla auto pilot.

7. Musk is doing a stealth cash raise by putting a time limit on auto pilot upgrades. The question is when will the next cap raise come. His noise around Tesla taxis, Level 5 autonomous systems, Model Y all speak to the snake oil promises that he needs to distract investors from what is clearly going on.

8. His public spat with his biggest supplier, Panasonic, will not end well. Suppliers have to be on board with production expansion. Panasonic is cooling off its relationship. Musk publicly slapped the Japanese battery maker. It doesn’t augur well for the rest of the supply chain either to see these ructions

Peter DeLorenzo wrote the following with respect to Musk,

That this latest charade from Musk is yet another desperate act in an attempt at saving his floundering company is obvious. Where it differs from other Muskian braggadocio is the fact that he is insisting that his AV technology is safe for mass application and consumption. Sorry to disappoint all of the St. Elon acolytes out there, but this is the insane part…

…Unleashing a fleet of zombie Teslas on the streets of America curated by a notorious nanosecond-attention-span personality such as Musk is the quintessential definition of flat-out crazy. You can’t even squint hard enough to suggest that this is, in some way, shape, or form, rational thought. It’s a case of an intermittently brilliant mind that has wandered over the line into the Abyss of Darkness. A dangerous mind that is so obsessed with pushing his perpetually sinking car company into some sort of elevated stratosphere that he is willing to treat real people as so much collateral damage...

This country is 25 years away – at least – from widespread adoption of autonomous vehicles. Yes, there will be scaled deployment in limited, commercial applications primarily in urban centers over the next two decades, but driverless Teslas careening around less than two years from now? It is a recipe for disaster the likes of which simply defies calculation.”

All the reasons CM has disliked Tesla remain. It is so chronically overvalued. This stock will be lucky to be $100 by year end. Sadly the economy is slowing meaning it will be tougher to compete with more competition launching this year. China may give cause for some future hope but don’t bet on it.

The more Musk talks, the more desperate he is. Don’t forget he is not learning from SEC requests to lay off Twitter. His guidance in 1Q is lower than recent tweets suggesting appreciably higher targets. Tesla is a time bomb.

Tesla – Musk baits the regulator again?

Anton Wahlman on Seeking Alpha has reported that Tesla held a secret telephone conference call to a limited audience which apparently contradicted statements made earlier in the public domain. If true, from a pure compliance and governance perspective that would violate fair disclosure rules. It is surprising that given Elon Musk’s run ins with the SEC that shareholders would hope he’d look to avoid further investigation rather than taunt the regulator.

According to the call transcript, Tesla provided new profit/loss guidance to the select few on the call. Even more bizarre is that Deutsche Bank compliance apparently let its Tesla analyst publish a report on March 1 based on the contents of the call, including margin guidance on the $35,000 Model 3 which was not divulged to others.

CM has always held that Tesla is an amateur car maker. Luring owners to deposit a non refundable $2,500 for a $35,000 Model 3 smacks of a silent fund raising to keep the ship afloat.

The company recently admitted it would close much of its dealer network and move to mobile servicing. Cute in principal but unlikely to be sustainable. Mainstream makers know that dealer/service networks are vital to keeping customers connected. If large recalls need to be conducted, mobile units aren’t going to cut it.

None of the above really surprises. Owning Tesla is sort of like joining a cult. The preachings from the fearless leader are designed to keep the disciples fiercely loyal. However if the government gets enough evidence to gather the SWAT team it will swarm the compound. This company is not worth anything like $50bn. Grab your popcorn.

Tesla Q2 – Simple Minds

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When Simple Minds wrote the lyrics to Promised you a miracle, never could they have imagined Elon Musk could have used them to present his earnings release:
The original lyrics:
Promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Chance as love takes a train
Summer breeze and brilliant light
Only love she sees
He controls on love
Love sails to a new life
Promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Only love she sees
He controls on love
Life throws a curve
Everything is possible
With promises
Everything is possible
Oh
 
I promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Chance reflects on them a while
Love screams so quietly
Slipping back on golden times
Breathing with sweet memories
I promised you a miracle
Belief is a beauty thing
Promises promises
As golden days break wondering
Only love she sees

Perhaps Tesla’s Q2 lyrics may have gone:

 

Promised you a miracle
Belief is a beauty thing
Promises promises
Model 3 customers left wondering
Ever more cashflow down the drain
Suppliers freeze as they’re $3bn light
Only delayed payables do they see
Yet he controls the bluff
Profitabilty sails to a distant life
Promised you a miracle
Credibility is a beauty thing
Promises promises
As the golden payday keeps wandering
Only trust he pleas
He loses controls on Twitter
Life throws a curve
Sledging Thai rescuers is possible
With promises
Everything is possible
Oh
I promised you a miracle
Belief is a beauty thing
Promises promises
As warranty provisions must take a hike
Investors reflect profits may take a while
Short sellers scream so quietly
Slipping back on golden times
Breathing with sweet memories
Banks were promised a profit miracle
Belief is a beauty thing
Promises promises
As targets keep fumbling
Only wait another quarter he says.
CM has said time again that Musk is a brilliant salesman. How he has managed to build a debt edifice worth more than GM, Ford & Fiat-Chrysler combined is a testament. Musk has continually missed delivery on so many promises that there is little stock in backing anything he says.
He championed $2bn in cash & equivalents but leaves out $5bn in accounts payble and accrued liabilities. The cash isn’t “net”
The company still reported $739mn negative free cash. While the rate may have slowed from Q1 it is shockingly high. Is it any wonder letters were sent to suppliers in an attempt to massage the figures to make the numbers look optically pretty.
Tesla wrote, “We aim to increase production to 10,000 Model 3s per week as fast as we can. We believe that the majority of Tesla’s production lines will be ready to produce at this rate by end of this year, but we will still have to increase capacity in certain places and we will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year.
The problem with this statement shows the naivety of Musk’s lack of knowledge on mars production. Profitability isn’t sustained by cranking to 10k/week if demand won’t be there when it hits that milestone. There are already flip-a-Model 3 websites littered with early adopters hoping to cash in on the initial euphoria. Yet if new stock is coming out that fast, many are likely to cancel orders because there is no arbitrage opportunity.
Customer deposits fell $42mn on the quarter. Tesla noted non-reservation orders are outstripping reservation orders. If reservation orders are stagnating because or cancellations or deliveries that is not a bold claim worth much. The company suggests it is no longer taking reservations in US or Canada because current supply can meet it but deposits would still be required to hold a car at a showroom before final payment so the customer deposit line should reflect that.
Even when CM ran the most optimistic of scenarios for Tesla, valuations would be mere fractions of what the stock trades today. Yet investors overlook the tsunami of new product from competitors made by brands who have spent decades perfecting production and have access to far superior distribution networks.
More smoke and mirrors. Simple Minds are all that is needed to read through the lines. Nothing remotely impressive with these numbers.
In closing, when the company talks of the ability to power slide the Model 3 when it has faced so much criticism over deaths related to false beliefs in its autopilot system you wonder whether Musk ever listens to legal advice? Well If he can blame the families of crash death victims it is clear he thinks of customers and investors as nothing more than beta testers. Then again if he can promise them miracles he is ultimately the winner if they buy into golden days.

Tesla Elongates Fight against ‘unfair’ media

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CM totally sympathizes with clickbait media cycle. Tesla CEO Elon Musk railed at the negative coverage surrounding the company in recent times. The memories are clearly short. The media is generally effusive with praise of Tesla. How most newspapers and magazines fawn over Musk! Dan Primack made this point well:

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Edmunds has also written a damning review of the Model 3 announcing how many problems the car has faced since it was bought.

Some things from the Edmunds long term test were as follows:

The most annoying of those issues was a repeated, uncontrollable increase in stereo volume, sometimes when we weren’t even in the car. Basically, the stereo would suddenly go to full volume without explanation. This and other issues are cataloged from our notes below:

• Would not recognize keycard in or on the console and hence would not go into gear. It did, however, unlock the car. Workaround was to force quit the app and restart the app. Then it would allow the choice of Drive or Reverse.

• The backup camera screen did not appear when reversing.

• Nav screen going haywire: zooming, scrolling, pinching, pixelating all at once.

• Audio system turning on by itself at full volume.

• Audio display randomly moving up and down the screen without any command from a human.

• Audio system came on and went to full volume all by itself while the car was off, locked and unoccupied. I heard it from 100 yards away. “Who is that joker playing his stereo so loud I can hear it from here?” Oh, it’s Elon. I turned it down, but it kept wavering up and down as I started driving, working against my repeated attempts to dial it down. Then it blasted all the way to maximum. My ears are still ringing two hours later. Fixed after reboot. Not sure about hearing damage.

• Audio page leaping up and down rapidly like the up-caret button to expand the source menu was being played with by a kid who ate too much candy. Concurrent with the volume problem above. Same reboot.

• Icons on the map screen flickering.

• The passenger vanity mirror fell off completely. Installed and held on only by double-sided tape. Reinstalled by pressing really hard on the mirror.

• The screen went completely dark on startup, no music or operation. Restarted the car. The screen worked; the backup camera did not.

• The car will not shift into Drive or Reverse upon startup. “Vehicle Systems Are Powering Up. Shift Into D or R After Message Clears.” Have to wait for it to power up. A loud click comes from the rear of the car as if a drive shaft is engaging and the message on the screen goes away.

• The car displays a new message: “Cannot Maintain Vehicle Power. Car May Stop Driving or Shut Down.” No shutdowns yet, but keeping an eye out.

• With 170 miles of range, the car displays a “Regenerative Braking Limited” message. Plenty of available space to store regen power. Logged the issue, then reset the screen with a reboot. The message has not displayed since.

• While the car was parked, the passenger sun visor was left down and the mirror fell out. Pressed back into place. Hoping it won’t fall out again.

While no one should expect reliability to be at levels of mainstream manufacturers that have been at it for decades longer, quality remains a big issue for Tesla. For Musk to slam the media will only lead to responses as this.

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If only Elon Musk could summon institutional questions

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Elon Musk has apparently terminated the question of a Bernstein analyst ((followed by the rest of the institutional queue) on the basis of it being “uncool”. He said, “We’re going to YouTube [for retail investors]. These questions are so dry. They’re killing me!” If only the Tesla CEO could summon the right type of questions that deflected criticism of the company as easily as maneuvering a parked Model S from a tight parking spot.

While he urged non-believers to sell the stock, there is little to be gained pushing a line of  opacity for a company with production issues, continuing losses and $10.6bn in debt. Earnings results are not about having fun but for investors/analysts to probe and qualify assumptions in the interest of making rational investment decisions.

CM has made constant reference to Musk’s amazing ability to sell. He is coming up to the pointy end of having to deliver. There are countless distractions which perculate below the surface – copyright infringement trial launched by Nikola Motor, the NTSB autopilot probe, countless resignations and recent calls to cut the staff canteen cookies. By blowing off the main investor pool that feeds him, the question of CEO capability becomes a bigger factor than the dreadful earnings themselves.

There is no better disinfectant than sunlight but Musk continues to deflect. Cash flow continues to decline  The production shutdown in April will thump Q2 earnings, not to mention the capex spend should rise plus the write off of equipment that has proven to be surplus to requirements. Here he is talking of 10,000 units a week down the line to fill the hearts of the faithful followers. Perhaps his comments about not needing to raise capital are best addressed by the fact he’s raised 7x since that statement.

Today’s results meeting is more telling in that snake oil salesman tactics of talking up the situation was replaced by silence and stonewalling. Telling.