1/ I started this account to be my journal of investing in Biotech stocks. (“Bad idea!” you say!) I’m a PharmD and thought it would be fun to make a new account to follow “Biotwitter” (hate that term!) and journal my thoughts. But lately I mostly just tweet about Tesla. Why?
2/ I have been following Tesla for a little less than a year now. I’m really not even sure what got me into it. But as biotech went on a massive run in 2017, I started thinking about hedging my risk with some short exposure.
3/ I remember after following Tesla for months I was definitely in the bear camp (this is a huge company with terrible balance sheet/margins/operations that behaves like an OTC biotech) over the bull camp (“Don’t bet against Elon”, profits will come with volume, EVs=future)
4/ But I still had no position. Then I read the WSJ story at the time about them making Model 3s essentially by hand. It seemed too unbelievable. (The company denied it but it was recently proven to be true.) I don’t know why but that got me off the bench.
5/ I bought my first put position the day before the Q3 2017 Earnings Call in November. Not even sure which contract. Earnings were…not good. The conference call was the real revelation. (Although, in light of recent history, maybe it seems pedestrian.)
6/ I really still didn’t have a strong opinion on Elon before this call. My millennial friends mostly loved him but to me he seemed to be trying too hard to be cool in a Silicon Valley billionaire way. Disclaimer: I don’t care about space travel, positive about EVs.
7/ I had spent years listening to Tim Cook on Apple conference calls. Tight, measured, laser focused on a message, relentlessly on topic. Elon on the Tesla call was the opposite. Jarringly so, in fact. Super loose, on tangents, chatting about random topics, taunting Toyota. Wow!
8/ Tesla bulls seem to love this behavior but it was everything I would not want in a CEO. To each their own. The stock did not do well the next day. My puts made money and since then I have traded around put positions and done pretty well, although not great. But positive.
9/ So why do a tweetstorm on this? What’s the point? Well, for the casual observer, I wanted to lay this out on the record. Tesla is entering a do-or-die end of 2018 in my eyes. I intend to summarize what I think is about to happen. Disclaimer: This is not advice, my opinion.
10/ Tesla is getting dangerously low on cash. When they report Q2 earnings in August (assuming no NT 10-Q), I expect them to have between 1 and 1.5 billion. Wide range, because so many variables. Inventory build, CapEx, how much they can draw credit lines.
11/ They have surprised me before so let’s say it’s slightly above 1.5 billion and I’m wrong. Elon is a master of maximizing debt and tapping those credit lines. He is very skilled at certain things! So, let’s say 1.7 billion and the lines are fully tapped at that point.
12/ Okay, 1.7 billion at EOB June 30, 2018. Q3 they are guiding for a profit and positive cash flow. One thing that seems consistent about Tesla post-Solar City acquisition and Model 3 manufacturing is that they lose a steady amount of money per car. There is no scale.
13/ The more cars they sell, the more they lose. The Model 3 components are expensive, the labor is expensive due to CA, all the OT/weekends and that tent thing (that freaking tent!) plus they have to build out delivery centers, service centers, and S+X get free supercharging.
14/ As best I can tell: The batteries are not getting much cheaper. The cars are not getting more reliable. Showrooms, service centers and superchargers need to be rapidly dialed up, not down. The more I research, the more I am shocked how expensive this all is to keep going.
15/ So I’m very skeptical about Q3 and Q4 profits. I’m going to put the Q3 loss at a pretty generous 400M, of which 200M is cash loss. If you don’t agree with this model and assumption, fine. I think it’s pretty generous to Tesla. Let’s say CapEx cut to the bone in Q3 is 500M.
16/ By the way, CapEx of 500M in Q3 should be very concerning to bulls if this company is truly building a Semi, new Roadster, Model Y, China Factory, revamping Norway and China infrastructures, etc etc. They are writing verbal checks that will need tens of billions to cash.
17/ So we started at 1.7B on June 30 and subtracted 200M for cash loss in Q3 and 500M for CapEx. Down to 1 billion. We haven’t got to inventory. Inventory continues to build. On all three models but especially the Model 3. The model allegedly with huge backlog.
18/ As @eriz35 has pointed out, the enthusiast site trackers for Tesla are pretty accurate at sampling a representative portion of the Tesla owner base. They track Model 3 production and deliveries. The Model S tracker before that was also accurate. Trends emerge.
19/ Something no one can seemingly figure out is that while Tesla is making more Model 3s over the last couple months, deliveries are not going up. They are, at best, flat. They seemingly are making tons more than they are delivering.
20/ Why? Well, if you can answer that, please inform the world. Either they can’t deliver them logistically, they aren’t making them, they are making them and they don’t work, they are hoarding them for some reason or the trackers suddenly became massively off. Or: No demand?
21/ Oh and on top of this, S+X sales are really not doing that well and I think there are signs that Model S is either being cannibalized by the 3 or is getting long in the tooth. These are their “cash cows” that minimize losses.
22/ So again, inventory is building on the S+X and but really building on the 3. In fact, it’s building at such a large rate I frankly still don’t believe it and will need to see the Q2 + Q3 numbers to even begin to guess what is going on here.
23/ All the money tied up in inventory is not being turned into cash. We are talking hundreds of millions of dollars. It’s inexplicable. So, we are far below a billion in cash now at end of Q3. Also, some of their cash is in China or otherwise locked up.
24/ The conventional wisdom is that Elon will squeak out a profit during Q3 earnings in November, say that Model 3 production is sustainable at 5k/week, and do a capital raise of equity or debt. I find many problems with this theory.
25/ Looking at earlier tweets I’m not sure Tesla can 1) reliably produce 5k/week (see the timeline of @skabooshka for how lumpy production is) 2) be profitable in Q3 and 3) have enough cash to last until the first week of November when they report.
26/ Working capital is deeply negative. Payables are stretched to the bone. I haven’t mentioned increasing refunds on deposits, with the 35k model pushed back time and time again. There are so many factors working against this company to take cash out of their account.
27/ If Tesla does not raise capital after Q2 earnings in August, I believe they will not be able to raise capital. It is simply unfathomable they have waited this long. What are they waiting for? This is a $54 billion company. How is Wall Street not alarmed?
28/ I learn from a lot of really smart people on Twitter. Could it be an SEC investigation into the SolarCity/solar roof vaporware? (H/T @BSA19741) Lack of institutional demand and money flow into the stock? (H/T @cppinvest) Other regulatory issue? (H/T like everyone.)
29/ There are an incredible number of red flags, lawsuits and weirdness with this company. They don’t even have an active shelf! Executives are leaving the company with huge options on the table. They are down to 3 key executives! Am I crazy?
30/ Spend a weekend doing a deep dive into the archives of @orthereaboot, who I can confidently say runs the best Tesla securities law Twitter feed pseudonymously named after a character from American Psycho.
31/ The more I read about this company, the more I can’t figure out. The news flow since I bought that first put has been almost completely negative. If I knew in November what I know now I would have thought this stock would be trading in double digits. Possibly single digits.
32/ For longs, it’s a religion. Certain fundmanagers and retail will not sell. Fine. But if net institutional selling is greater than buying, no retail can make up the difference. No one has ever done a capital raise from retail. (Although if anyone could, it would be Musk.)
33/ I’m fascinated what the end game is with this stock. I am pretty confident they will never make money. If they ever make a sustainable GAAP profit, @TeslaCharts says he will delete his account and I think a lot of bears would! (Why go on without TC?!) I would be wrong.
34/ Back to where I started: In the next four months, I think Tesla will either straight up run out of cash or they will do a capital raise at a deep discount from a position of weakness hammering the stock. I see nothing but negative catalysts.
35/ Based on this, I own puts but not recommending you own them. I want to buy more puts cheaper later! I have Sep 2018, Jan 2019 and Jan 2020, pretty far OTM. I really shouldn’t own the January 2020 but it’s an insurance policy against some long halt or weirdness.
36/ I am not a financial professional. I don’t run a model portfolio. I am not licensed to give advice. I am not playing with a huge part of my net worth. All the disclaimers! But I cannot stop thinking about this damn stock!!!
37/ There is so much more to write about Tesla. A million rabbitholes. Elon Musk, although not my idea of a good CEO, is really good at distraction, PR and mobilizing his millions of followers. They are super f’n pissed about short sellers and they want you to know!
38/ This is the best entertainment in the public markets and you can bet on it. As @biohazard3737 put it (paraphrasing from memory) shorting Tesla is like a CDS on the entire system. (Great biotech and Tesla follow btw!)
39/ If you can’t short a perpetually unprofitable, $62 billion Enterprise Value company in a capital-intensive industry with 3 to 5 months of cash left in the bank in a rising rate environment that has possible undisclosed SEC investigations… Then, what large cap can you short?
40/ If I win, I win big. If I lose, I will own it and accept it as tuition money for all I have learned. Either way, I am excited for the @CGrantWSJ and @tweetermeyer tweets and articles to come. Thanks for reading and sorry to my 285 followers for the timeline clog.
Outlined this on Friday btw before Elon went nuts on Twitter. But I would say that only emboldens my opinion this company is in trouble...
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