Musk’s Tesla problem
And his elegant solution
When I first saw the news that Elon Musk had made a bid for Twitter, I was equal parts giddy and in awe. The giddy part? “The left” was going to have a hard time walking back “If you don’t like it… build your own platform….” Or “Twitter is a private company, they can do what they want.” The rage, fear, and some Senators calling for Elon to testify before Congress to explain his plans for Twitter have been better than I ever could have hoped, and his continual trolling has been made better by the day.
My awe has been that from the very first moment, I knew what Musk was doing. He has already sold over $9 billion of stock to finance his $21 billion equity commitment (the other $23 billion to be supported by a loan secured by his stock …. for now). With a capital gains rate at 20% and lower than it will likely be in a few years, Elon wins. With Tesla stock valued more than 10x where it should be, by selling it, he wins. By buying Twitter and using Scott Galloway’s financial metric comparison to Meta on revenue growth opportunities, it’s fair to say Twitter could be a 4x for Mr. Musk. And, by trolling the entire left about the purchase, the same owners of Tesla stock will want him out of Tesla entirely and they will double down on their ownership in the company as “more than a car company” enabling him to sell all $170 billion of stock in relatively short order. The net result? Elon is executing perfect capitalism using overpriced shares and a low tax rate to buy an undervalued company with way more upside and remain the world’s richest man. Bravo!!
Below is the best piece I’ve seen that comes from Mark Spielgel, a hedge fund manager who made 22% in April while the S&P was down 8.9%. Tesla is in major trouble with competition, supply chain, and corner cutting and Elon is about to hand the bag to the “energy transition” ESG greenwashing money managers and passive SPY index holders. It’s beautiful to behold… and highly entertaining.
Investor letter comments on Tesla from Mark Spielgel
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; now I can provide a much more recent analogy: Tesla is Netflix.
For years, Netflix had an absurd valuation based on its pioneering position in streaming media, but once it proved that such a market existed a myriad [of] competitors swarmed all over it, and in April the stock collapsed when we learned that not only is Netflix no longer in “hypergrowth” mode but, for the first time since 2011 (when it transitioned from physical DVDs), it actually lost subscribers.
I believe Musk knows that Tesla is “the next Netflix” (hence his recent “Twitter buying distraction”), with VW, Hyundai/Kia, Ford, GM, BMW, Mercedes, BYD & other Chinese competitors and, in a few years, Toyota & Honda, being the Disney, HBO Max, Amazon Prime, Peacock, Hulu, Paramount +, etc., of the electric car market, stealing Tesla’s share and eventually pounding its stock price down 95% or so from today’s, into the valuation of “just another car company.”
In fact, in April, Tesla reported that Q1 deliveries were sequentially nearly flat (just 1398 additional cars, a gain of just 0.45%) vs. the previous quarter, and even that was only “achieved” by a sneaky redefinition by Tesla of what “a delivery” is.
Yes, the company is chip-constrained, but its competitors (who, unlike Tesla, are unwilling to delete safety equipment or use untested chips to maintain production) are even more constrained, and in fact waiting times are longer for Tesla’s direct EV competitors than they are for a Tesla; for instance, Ford’s Mustang Mach-E is so in demand that it has even halted additional orders for the 2022 model year. (Current annual Mach-E production capacity is around 65,000 for the U.S. & Europe and tens of thousands more for China, but in 2023 U.S. & European capacity will expand to 200,000.)
The worst thing that can possibly happen to “the Tesla story” will be when its German and Texas plants are fully operational and the subsequent excess capacity stares the world right in the face, thereby ending its myth of “unlimited demand” (especially at current, drastically-raised prices, where the cheapest Model 3 now starts at $47,000 and the cheapest Model Y begins at $63,000); in fact, look for margin destroying price cuts by late this year or early 2023.
Meanwhile, the “record” profits that accompanied Q1’s nearly flat delivery number were obtained via a myriad [pf] one-time items, including $679 million of emission credit sales that will disappear over the next year or two as every automaker ramps up its EV sales, a mysterious $502 million reduction in SG&A expense (of which only $140 million was due to reduced stock comp) despite opening new factories in Germany and Texas (what is Tesla capitalizing instead of expensing?) and a combination of FIFO accounting and multiple sticker price increases that allowed Tesla to expense rapidly rising raw materials costs at older, lower prices while selling cars built from those materials at new, considerably higher prices.
Adjusting for these factors, Tesla had GAAP earnings for the quarter that were at least $1/share lower than the posted $2.86, and annualizing that realistic $1.86/share to $7.44 means that at April’s closing price Tesla (on a no-growth quarter) had a PE ratio of around 117 vs. an industry-wide figure of less than 10. (Also, Tesla’s Q1 free cash flow was only around $1.8 billion, a drop of almost $1 billion vs. the previous quarter, despite a massive increase in net accounts payable.)
And for those of you who think that Tesla is “really an energy company,” in Q1 “Tesla Energy” had revenue of just $616 million (down 10.5% sequentially) and cost of revenue of $688 million, meaning it had a negative gross margin. So if Tesla is “really an energy company,” it’s even more screwed than if it’s just a car company!
Meanwhile, many Tesla bulls sincerely believe that ten years from now the company will be twice the size of Volkswagen or Toyota, thereby selling around 20 million cars a year (up from the current run-rate of around 1.3 million); in fact in March Musk himself even raised this as a possibility.
To illustrate how utterly absurd this is, going from 1.3 million cars a year today to 20 million in ten years means that in addition to one million cars a year of eventual production from the new German and Texas factories, Tesla would have to add 35 more brand new 500,000 car/year factories with sold out production; i.e., a new factory nearly every single quarter for ten years! And what then? Well, then you’d have a car company approximately twice the size of Toyota (current market cap: $239 billion) or Volkswagen (current market cap: $97 billion). If that would make Tesla worth, say, $500 billion in 10 years, discounting that back at 15%/year and allowing for enough share dilution to pay for all those factories, Tesla—in that absurdly optimistic scenario—would be worth just $100/share today, down almost 90% from its current price. (To be clear, I think it’s going much lower than that!)
Another favorite hype story from Tesla bulls has been “the China market,” but Tesla’s Q1 2022 domestic China sales sequentially declined by approximately 8000 units vs. Q4 2021, and it had only around 1.9% of the overall Chinese passenger vehicle market and just 11% of the BEV market.
Meanwhile, as Tesla continues to sell its fraudulent & dangerous so-called “Full Self Driving” the head of that program recently took a four-month sabbatical; the last major Tesla executive who did that (Doug Field) never returned. In a sane regulatory environment Tesla, having sold this garbage software for over five years now…
Great summary of what Elon’s doing. I hadn’t realized just how good a move this was for him.
Love those numbers. Keep it up