Tesla Still Has A Completely Absurd Diluted Market Cap – Shortseller

March 2, 2022

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By Jacob Wolinsky. Originally published at ValueWalk.

Stanphyl Capital’s commentary for the month ended February 2022, discussing their short position in Tesla Inc (NASDAQ:TSLA).

Q4 2021 hedge fund letters, conferences and more

We remain short the biggest bubble in modern stock market history, Tesla Inc (NASDAQ:TSLA), which despite this year’s nearly 18% dive still has a completely absurd diluted market cap of almost $1 trillion despite a steadily sliding share of the world’s EV market and a share of the overall auto market that’s less than 1.5% (yes, less than one POINT five percent). Here’s why we remain short:

Tesla has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of its electric car technology (which has now been surpassed by numerous competitors), while existing automakers—unlike Tesla—have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably.
Excluding working capital benefits and sunsetting emission credit sales Tesla generates negative free cash flow.
Growth in sequential unit demand for Tesla’s cars is at a crawl relative to expectations.
Elon Musk is a pathological liar who under the terms of his SEC settlement cannot deny having committed securities fraud.

Tesla’s Q4 Results

In January Tesla reported results for Q4 2021 and once again proved that it’s a truly horrible business. Although the company claimed to have generated $2.8 billion in free cash flow for the quarter, that was almost entirely created by massively increased payables & accrued liabilities, and by stock-based compensation. After adjusting for those factors (and a tiny increase in receivables), Tesla’s free cash flow was just $119 million, and that undoubtedly included several hundred million dollars of previously earned & billed emission credit sales, a revenue stream which will almost entirely disappear next year as other automakers begin selling enough electric cars of their own. Thus, despite all the sell-side and media hype, on a sustainable basis Tesla’s free cash flow is still resoundingly negative.

Also in January Tesla reported Q4 deliveries of 308,000 cars, a 67,000-unit gain over Q3 that’s a rounding error for an auto company trading at even one-tenth of Tesla’s valuation. If in any quarter GM or VW or Toyota sold 2.067 million vehicles instead of 2 million or 1.933 million, no one would pay the slightest bit of attention to the difference. Seeing as Tesla is still being valued at over thirteen GMs, it’s time to start looking at its relatively tiny numerical sequential sales growth, rather than Wall Street’s sell-side hype of “percentage off a small base.” In other words, if you want to be valued at a giant multiple of “the big boys,” you should be treated as a big boy.

And for those of you who think that Tesla is “really an energy company,” in Q4 “Tesla Energy” had revenue of $688 million (down 8.5% year-over-year and 8% sequentially) and cost of revenue of $739 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, perhaps the biggest reason Tesla has recently been able to post marginally increasing sequential quarterly deliveries is because competitors’ production is at the lowest level in decades due to the massive chip shortage, thereby eliminating a number of “Tesla alternatives.” Yet Tesla is enjoying record production because Musk (a notorious “corner-cutter”) is apparently willing to either substitute untested, non-auto-grade chips for the more durable chips he can’t get (please see my Twitter post about this) or simply eliminate entire crucial safety systems such as back-up steering and crash-avoidance radar.

The Expectations Of Tesla Bulls

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 21 million cars a year (up from the current run-rate of around 1.2 million). To illustrate how utterly clueless this is, going from 1.2 million cars a year today to 21 million in ten years means Tesla would have to add a brand new 500,000 car/year factory with sold out production EVERY single quarter for ten years!

To do this even in twenty years would require adding a new factory with sold out production every six months, at which point Tesla would then be approximately twice the size of Toyota (current market cap: $252 billion) or Volkswagen (current market cap: $111 billion), making a Tesla twenty times its current size worth perhaps $500 billion in twenty years. If you discount that $500 billion back by 15% a year (which is likely a much smaller return than any Tesla bull expects) for twenty years, you get a net present value for Tesla stock of approximately $30 a share, down nearly 97% from January’s closing price. That’s why when idiot Tesla bulls look at the company’s current large trailing percentage growth from its recent tiny base and extrapolate that into the future they’re being, well… idiots!

A favorite hype story from Tesla bulls has been “the China market” and its “record” number of 116,000 Q4 deliveries there vs. 73,659 in Q3. However, not only was this (again) a growth rounding error, but much of that gain was almost certainly comprised of “pull forward” sales due to a 30% subsidy cut beginning in January. And even that “big” Q4 number gave Tesla only around 1.5% of the overall passenger vehicle market and just 11% of the BEV market.

Meanwhile Tesla continues to sell its fraudulent & dangerous so-called “Full Self Driving.” In a sane regulatory environment Tesla having done this for five years now…

…would be considered “consumer fraud,” and indeed the regulatory tide may finally be turning, as two U.S. senators continue to question its safety and in October the NHTSA appointed a harsh critic of this deadly product to advise on its regulation. (For all known Tesla deaths see here.) Are major write-downs and refunds on the way, killing the company’s slight “claimed profitability”? Stay tuned!

Meanwhile, Guidehouse Insights continues to rate Tesla dead last among autonomous competitors:

Another favorite Tesla hype story has been built around so-called “proprietary battery technology.” In fact though, Tesla has nothing proprietary there—it doesn’t make them, it buys them from Panasonic, CATL and LG, and it’s the biggest liar in the industry regarding the real-world range of its cars. And if new-format 4680 cells enter the market some time in 2024 (as is now expected), even if Tesla makes some of its own, other manufacturers will gladly sell them to anyone.

Meanwhile, Tesla build quality remains awful (it ranks second-to-last in the latest Consumer Reports reliability survey) and its worst-rated Model Y faces current (or imminent) competition from the much better built electric Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 Recharge, Volkswagen ID.4, Ford Mustang Mach E, Nissan Ariya, Hyundai Ioniq 5 and Kia EV6. And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2, the great new BMW i4 and the premium version of Volkswagen’s ID.3 (in Europe), plus multiple local competitors in China.

And in the high-end electric car segment worldwide the Audi e-tron (substantially improved for 2022!) and Porsche Taycan outsell the Models S & X (and the newly updated Tesla models with their dated exteriors and idiotic shifters & steering wheels won’t change this), while the spectacular new Mercedes EQS, Audi e-Tron GT and Lucid Air make the Tesla Model S look like a fast Yugo, while the extremely well reviewed new BMW iX does the same to the Model X.

And oh, the joke of a “pickup truck” Tesla previewed in 2019 (and still hasn’t shown in production-ready form) won’t be much of “growth engine” either, as it will enter a dogfight of a market; in fact, Ford’s terrific 2022 all-electric F-150 Lightning now has over 200,000 retail reservations (plus many more fleet reservations), GM has introduced its fantastic 2023 electric Silverado with over 110,000 reservations and Rivian’s pick-up has gotten excellent early reviews.

Regarding safety, as noted earlier in this letter, Tesla continues to deceptively sell its hugely dangerous so-called “Autopilot” system, which Consumer Reports has completely eviscerated; God only knows how many more people this monstrosity unleashed on public roads will kill despite the NTSB condemning it. Elsewhere in safety, in 2020 the Chinese government forced the recall of tens of thousands of Teslas for a dangerous suspension defect the company spent years trying to cover up, and now Tesla has been hit by a class-action lawsuit in the U.S. for the same defect. Tesla also knowingly sold cars that it knew were a fire hazard and did the same with solar systems, and after initially refusing to do so voluntarily, it was forced to recall a dangerously defective touchscreen. In other words, when it comes to the safety of customers and innocent bystanders, Tesla is truly one of the most vile companies on Earth. Meanwhile the massive number of lawsuits of all types against the company continues to escalate.