Tesla has a been a hot topic company over the last couple of years, praised for bringing revolutionary change to the automotive sector with their sleek cars, sexy marketing, and glorified CEO - Elon Musk. However, despite having developed a cult-like following that drove the stock price through the rough a year ago, this analyst has been bearish all along.
The thesis may have originated from a biased liking of petrol engines and fossil fuels, and a pessimistic stance towards venture sustainability, however it has matured with time into a legitimate - and frankly obvious - short play that I can no longer keep quiet about.
It is important to acknowledge the fact that Elon Musk has served an invaluable role in the promotion of sustainable technology with Tesla and inspired a generation of future engineers. Elon Musk has also greatly contributed to the automotive sector in expanding its scope of business, while making it seem like he's also gained most of its market cap. Recent events focused around Tesla have clearly proven otherwise. Tesla, Inc. trading under the symbol $TSLA on the NASDAQ exchange has recently retraced 12 months of gains, 28% off it's ATH. Tesla was, and still is overvalued.
The Fundamental Thesis
"Res tantum valet quantum vendi potest." A thing is only worth what someone else is willing to pay for it - a message the certainly rings true with many Tesla shareholders. Valuation does not matter as long as you are able to sell the stock to someone else for a higher price, which is great when considering overvalued and "bubble"-like stocks. However, is coming to investor attention that there are less people that are willing to buy the stock at a higher price with trading day.
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Note the recent decline in Tesla's share price.[/caption]
So far investors have not been long Tesla for the right reasons. Many consider owning Tesla stock a long and deep value play for them, no matter if the stock is overvalued or not. They believe that the future is in electric cars and that Tesla will lead the industry, however they neglect some critical issues that make it hard for Tesla realize it's marketed potential.
The Silicon Valley-esque "roll out now - update later" strategy does not apply to the automotive sector. Despite having a quality product, production milestones are difficult to overcome when the company is drowning in debt. With demand for the Model S and X dropping Tesla has a lot riding on their Model 3 while being unable to meet the production requirements. Yet Tesla is valued twice as much as Ford - a company that manufactured 6 million cars last year (profiting $7.6 B), while Tesla made 100,000 cars and took a loss of $2 B. What's more is Tesla - in need of capital - also issued $1.8 B junk bonds in August. Tesla is simply not profitable.
Banking on Management
For many investors management is the most important factor in determining the future success of a company. Tesla both excels in its management forefront with Elon Musk and fails dramatically. While Elon Musk is a fantastic engineer, and an even better marketer, he may not necessarily be the best CEO. As aforementioned, Elon Musk's leadership comes with the typical Silicon Valley mentality of getting a product out on the street and dealing with problems later. For instance, the Model 3 was praised when it came out for being "future ready" - with cameras inside and outside the car, a simple design, and everything needed to facilitate a driverless experience and future car sharing options. Tesla investors doubled down on their shares - as most Tesla investors do whenever Elon Musk breathes. However, in truth the Model 3 appears to be mostly an overhyped, unfinished car, with persisting problems, poor production output gouging prices (if you want your Model 3 before other people get it the price goes up), and lastly unreliable self-driving that is now subject to an investigation.
Of course, as Elon Musk advertises, Tesla is not just a commercial car company relying on three cars. Tesla also is releasing a roadster (that should actually fetch quite a demand amongst tech-savvy Valley millionaire) and a commercial truck. Much like with Tesla's electric cars - their marketing is superb in making niche areas like electric trucking relevant. However, that doesn't make Tesla the only company on the market: Thor Trucks and Mercedes-Benz are also in the business.
Also, investors should consider the following excerpt from page 24 of Tesla's 2017Q4 10-K Form.
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Statements like this one would cause rational investors to lose sleep: "Although Mr. Musk spends significant time with Tesla and is highly active in our management, he does not devote his full time and attention to Tesla."[/caption]
Tesla shareholders have also recently approved a compensation scheme for Elon Musk. The juxtaposition of the previous excerpt in line with a review of Tesla CEO's compensation package is intentional.
As quoted from Fortune.com:
The new plan keeps Musk at Tesla until 2028 and promises up to $50 billion in stock option awards which will vest in increments if specific financial goals are met. Though Tesla’s current $53 billion market value would have to grow to $650 billion for Musk to reap the full benefits of the compensation package.
As Business Insider cleverly calculated; Elon Musk would make more a year than every single CEO of the SP500 combined.
Tesla was a revolutionary company for its marketing and innovation of electric cars in what used to be an infant industry. For early adopters and investors of Tesla's shares the company stood to be a solid investment. However, in bringing popularity to electric cars Tesla has effectively provided an incentive for larger automotive companies, with highly efficient production lines, to enter the market of electric vehicles. While Tesla struggles countless other brands such as BMW, Jaguar, Porsche and Mercedes-Benz have been ramping up research and development in order to squeeze profits away from Tesla. Even though Tesla has developed a cult following and hangs on to extreme brand favoritism, competition is set to turn Tesla into a mediocre brand or even - to ultimately - bankrupt the company.
The Porsche Mission E stands to challenge the appeal of the sporty Model S, and has already been spotted testing lap times at the German Nürburgring track. Waymo - Google's self-driving initiative - has turned to Jaguar in the expansion of its self-driving fleet. Uber also contracted Volvo for their autonomous fleet production - not Tesla.
Unfortunately, while Tesla is a great brand that remains in demand it is not a great company. Manufacturing makes great brands, and Tesla lacks the manufacturing focus necessary to compete with traditional automakers. Some factors to consider are:
- High employee turnover - Tesla employees are subject to unrealistic production goals which cannot be met, and are in turn laid off.
- Non-standardized manufacturing - averaging 20 improvements per week, Tesla changes the cars they produce everyday. A production method that does not scale well.
- Introducing more products before existing products are perfected - the Model X still has a myriad of problems that are not being tended to.
- Poor revenues per employee - Tesla aims to have machines build their products, a model that is not currently working.
Tesla is a company that is rich in demand with a product that has opened up the doors to what was previously and infant industry. Production flaws, increased competition, and outstanding debt are closing in on a company that can no longer meet the expectations of its investors. JP Morgan, UBS, and other institutional investors are now pushing the envelope in shorting the company in the "next big short". The reality is, given Tesla's current state of operations and poor financial performance short investors may very well cover their positions at $0.
Disclosure: I am short TSLA.