Stanphyl Capital is a New-York based fund run by Mark Spiegel. Spiegel has been a vocal critic of Elon Musk and Tesla (TSLA, Financial), with a well-publicized short position. His latest quarterly letter lays out his thesis.
No moat
Tesla lacks anything that would give it a meaningful competitive advantage over other carmakers. Its battery technology is not proprietary and it remains behind its competitors in autonomous driving. Moreover, the company’s irresponsible marketing of its Autopilot system has the potential to come back and haunt it. In Spiegel’s words:
“Tesla has no 'moat' of any kind; i.e., nothing meaningfully proprietary in terms of electric car design or technology, 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.”
Altered narrative
Over the last 12 months, coverage of Tesla has shifted away from characterizing the company as a "growth story." The most significant change came from Morgan Stanley’s Adam Jonas, one of the biggest Tesla bulls out there. Back in May, he said the company was now a “distressed credit and restructuring story.” The note from Stanphyl Capital echoes this sentiment:
“Tesla is now a 'busted growth story'; demand for its existing models has peaked and it will have to raise billions of dollars to produce new ones in a soon-to-be saturated market”.
Poor financials
Spiegel also noted:
“Tesla is losing a ton of money with a terrible balance sheet while confronting massive competition in every aspect of its business.”
The company continues to lose money on every vehicle sold, a problem exacerbated by the constant price cuts, moves that are necessary to sustain demand. To compound the issue, it is facing further cuts to the electric vehicle tax credit that buyers can take advantage of, as well as tens of billions in debt obligations.
Competition will continue to be a painful and growing problem, with the Audi Q4 e-tron and BMW iX3 hitting the market soon, and the Jaguar I-Pace already garnering much praise. Crucially, this issue will only become worse for Tesla as time goes on.
Weak leadership
The letter also criticized management, saying:
“Elon Musk is extremely untrustworthy.”
It should not be news to anyone that Musk has exhibited increasingly erratic behaviour over the last year, from accusing people of crimes without evidence to claiming Tesla would be going private. Now this is but a small part of the short thesis, but it should be noted this kind of behavior is hardly helping the company.
Moreover, there has been a mass exodus of senior executives from the company, most recently the vice presidents of production and engineering, as well as the principal autopilot engineer. This simply does not happen at a well-functioning business, where executives are incentivized via stock options.
Summary
All in all, Spiegel’s short thesis is compelling. As we approach the second-quarter earnings call, it is difficult to see how Musk will be able to spin the results, which are widely expected to be quite poor. All eyes will be on the call to see whether he can pull another rabbit out of the hat.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Howard Marks: The Most Valuable Lessons Are Learned in Hard Times
- 2 Pieces of Investing Wisdom From John Bogle
- Howard Marks: Everything Is Cyclical
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