Tesla’s (TSLA, Financial) share price may have skyrocketed to all-time heights and its market capitalization may be approaching $300 billion, but Greenlight Capital founder David Einhorn (Trades, Portfolio) isn’t ready to throw in the towel on his short position yet.
Einhorn has been a vocal critic both of Tesla and of its CEO Elon Musk, saying in the past that there are unresolved issues surrounding the way that Tesla books its accounts receivable. In Greenlight’s latest letter to investors, Einhorn explained his continued bearishness on the electric vehicle manufacturer.
Changing accounting practices
One of Einhorn’s main arguments against Tesla as a stock concerns product quality. For a company that positions itself as a luxury brand, it has an unusual number of consumer complaints lodged against it. Chief amongst these is the ongoing investigation by the National Highway Traffic Safety Administration (NHTSA) into the tendency of Tesla vehicles to suddenly accelerate while the driver is attempting to break. The more technologically sophisticated a product becomes, the more unforeseen interactions there are between its constituent parts. Einhorn does not believe that the market is adequately pricing in these quality issues.
In addition to this, Greenlight Capital has more questions regarding Tesla’s accounting. Tesla has managed to post four consecutive quarters of profits, making it technically eligible for inclusion in the S&P 500. Einhorn believes that this has been achieved by gaming the rules of accounting (a well-supported and well-documented assumption - it's all in the regulatory filings, for those who look closely). Tesla’s second quarter profit was achieved only due to sales of regulatory carbon credits granted to it by the government. In the past, revenue from credit sales were recognized in the same quarter that they were sold. However, in the first quarter of 2020, Tesla discontinued this practice:
“In both the March and June quarters, TSLA sharply increased its recognition of regulatory credits. The company reported regulatory credit sales of $782 million in the first half of 2020, compared to $594 million in all of 2019. Historically, TSLA received cash for regulatory credit sales, but this year they have piled up in accounts receivable.”
The letter went on to point out that in the past, Tesla’s main credit buyer was Fiat Chrysler (FCA, Financial), whose recognition of expenses is at odds with Tesla’s over the last two quarters. Fiat Chrysler recognised around $370 million in credit sales in the first half of 2020 - less than half of Tesla’s. Notably, in the past, the two totals have been closely matched.
These strong arguments show that Greenlight has no intention of laying off their short position - and it’s not difficult to see why. Even if Tesla can answer Einhorn’s accounting queries satisfactorily, there still remains the undeniable fact that the electric automaker is trading at extremely expensive levels. Its market cap is larger than that of Ford (F, Financial), BMW (BMW, Financial) and Fiat Chrysler combined, despite selling far fewer cars than any one of them - not a recipe for a good value play.
Disclosure: The author owns no stocks mentioned.
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