In April 2017, we posted another article explaining why we short Tesla shares again (https://l2capital.com.br/en/?s=tesla), after obtaining excellent returns with this position in mid-2015.
Once again, it is important to make clear our vision of the company, its founder and the segment: we like them all, we think Tesla is revolutionary, Elon Musk is a visionary and we believe electric vehicles are the future.
Electric vehicles are safer, have lower maintenance costs, lower fuel costs, cause less pollution (after manufacturing and while running) and have a higher resale value.
Tesla managed to address the three negatives: longer refuelling time, vehicle autonomy (distances were very short and now can reach distances over 400 km) and the cost of batteries.
The big question is how long Tesla will be able to “burn cash” without causing stress to its investors. For now, we are seeing their patience remain at extremely high levels, giving the company CEO enough time to move forward with his projects.
We have to think that, apparently, Tesla investors are different from those of Ford and GM. While the former are concerned about growth, the latter are more concerned with profits and dividends. Thus the former are willing to accept losses for a certain period of time in exchange for greater growth and market share in the future, while the latter are not (the key here is “a certain period of time”).
We can even try to draw a parallel between Amazon and Tesla. Amazon also “burnt cash” in the early years of operation, reinvesting heavily in the business to make it grow. Obviously, Amazon did not dilute its investors every year nor raise debt for bigger and bigger investments, endangering its survival.
But Amazon also did not have to invest in a network of superchargers, which requires high CAPEX, nor in factories, etc. Although both companies are considered to belong to the technology sector, the peculiarities make the difference and the comparisons between the two companies have little relevance.
Tesla has been investing, on average, 23% of its next year’s revenues in CAPEX. In this it has been (to this day) consistent. As sales are rising, CAPEX, although also rising, has been maintaining its average during this period. Thus, if we accept that Tesla’s sales should increase in the coming years, this value of CAPEX, in terms of revenue, should decrease, leading the company to profitability (so say the bulls).
The company still has about $ 3.5 billion in cash and the advantage of being the first to focus 100% on the electric car sector. If the company continues with this volume of CAPEX and SG&A, the cash will only last until the second, perhaps third quarter of 2018. Thus, a new issue of shares or debt is expected.
In addition, they had problems in the manufacture of Model 3 and the flamboyant CEO also announced the roadster and the electric truck, two big challenges. Not to mention that Tesla absorbed Solar City in 2016, a company that, like Tesla, is not profitable.
Well, the big question is how long the company will be able to fund itself in the market at super beneficial terms.
The industry is really exciting and has attracted the attention of giants such as Volvo, Audi, VW, BMW, etc. This new competition comes at the same time as tax breaks for the purchase of electric cars are coming to an end. And these tax breaks are one of the biggest benefits to buyers. As an example, in Hong Kong, Tesla’s sales fell from 2,939 vehicles in March 2017 to zero in April, when tax advantages ended. It is also good to mention that Amazon did not have this level of competition when it started.
Tesla has already built a solid supercharger infrastructure that gives it a big edge over other automakers in the US, but investors need to adjust their models constantly. The goals set by the CEO almost never materialize in the promised time and there are always “surprises” or, as the more skeptical investors would say, more costs and cash burn with the novelties.
One interesting point we heard from Mr. Robert Maurer is about the competition. The CEOs, boards and management of the major automakers are over 55 years old, with a vision of staying at least another 10 years in front of those companies. In 10 years, electric cars will not get them all out of the market. Thus, as the compensation of these professionals is directly linked to the financial performance of the company, they have very little incentive to increase the CAPEX and, consequently, decrease the cash generation and profits for now.
In addition, their investor base is also tied to dividends and profits and will not want to see dividends cut and lower profits in the coming years.
Despite this, we maintain our view of Tesla: it is a company directly linked to the excesses of the times in which we live, where Central Banks play with interest rates and manipulate the prices of everything. Tesla may be able to do very well and lead a new segment in the automotive industry, but there are no guarantees.
Tesla can be seen as a bet on the success of CBs in kicking the can down the road. The company needs time to finance itself in the market and achieve profitability. We do not know how long this can take.
Thus, we maintain our negative view on the company’s valuation and think that the benign scenario the company has enjoyed up to today may quickly turn for the worse. Time to abandon the ship.