Posted on October 25, 2018 by Matt Pressman
One of Wall Street's most famous short sellers, Andrew Left of Citron Research, has been trying to make a mockery of Tesla for years. Five years ago Left crowed, "By the time this [Model 3] product is even approaching market, there will be multiple other 200-mile range plug-ins that have been out for years." In turn, Left bet heavily against Tesla — sure that the electric automaker was doomed. Then, it all changed.
Above: Tesla's Model 3 (Image: Tesla)
When Tesla surprisingly pushed their Q3 earnings forward, Left got religion. He wondered, "Does anybody think that Tesla decided to move up its earnings release date because of bad news?" His come-to-Jesus epiphany was revealed in a shocking report, that left Left (no pun intended) a sudden believer in the automaker. Looking back, was there any truth to Left's newfound contentions (and confidence) surrounding Tesla?
Contention #1: Left argued, "While the media has been focused on Elon Musk’s eccentric, outlandish and at times offensive behavior, it has failed to notice the legitimate disruption of the auto industry that is currently being dominated by Tesla. What has changed? Plain and simple — Tesla is destroying the competition."
Verdict: You decide. Tesla's Shareholder Letter states, "Q3 2018 was a truly historic quarter for Tesla. Model 3 was the best-selling car in the US in terms of revenue and the 5th best-selling car in terms of volume." Furthermore, "Due to the ingenuity and incredible hard work of our team combined with an innovative vehicle design and manufacturing strategy, we have achieved total auto gross margin of ~25%."
Above: A look at US passenger car sales in Q3 and the dominant position of Tesla's Model 3 (Source: Tesla)
Contention #2: Referring to the Model 3, Left argued, "it is not just pent up demand from people on the reservation list... [more] people are spending more money to be a part of the 'Tesla Revolution.' TSLA is not just pulling customers from BMW and Mercedes but also from Toyota and Honda. Like a magic trick, while everyone is focused on Elon smoking weed, he is quietly smoking the whole automotive industry."
Verdict: Left seems to be onto something. Tesla revealed during earnings, "Model 3 is attracting customers of both premium and non-premium brands... Based on trade-ins received from customers since the start of Model 3 production, more than half of those trade-in vehicles were priced below $35,000 when new. It is clear that customers are trading up their relatively cheaper vehicles to buy a Model 3."
Contention #3: Left said, "While the media parades around short sellers (yes, Citron has been one of them) attempting to make a piñata out of Tesla and Musk... Tesla [and Musk] will, finally, after 10 years of unprofitable existence, have the ability to prove that it can be a sustainable, highly cash flow generative entity."
Verdict: This is proving to be correct. Tesla's earnings blew away Wall Street's expectations. Finally profitable, the company announced, "we achieved GAAP net income of $312 million... and we had free cash flow (operating cash flow less capex) of $881 million." Furthermore, "as we have transformed from a 100,000 per year unit carmaker into a ~340,000 unit per year carmaker, our earnings profile has flipped dramatically."
Above: Over the years Tesla has struggled to turn a profit — that is, until now (Source: Wall Street Journal)
Contention #4: Left contends, "No OEM is even close to having Tesla’s level of connectivity and 'upgradeability' in its cars. Tesla is dominating the industry with no advertising, no unions, no dealer network. It has 1,100 charging stations and a Gigafactory." He adds, "No tequila, flamethrowers, or short shorts - just a revolution in the transportation industry."
Verdict: Forget the sideshows. Tesla announced the unveiling of, "Version 9.0 of our vehicle software, which marks our biggest software upgrade." In addition, there are now "351 [store and service] locations worldwide... [and] a total of 1,352 Supercharger stations." And don't forget Tesla's new Gigafactory in Shanghai which should "bring portions of Model 3 production to China during 2019."
Contention #5: Left writes, "Rumors of the Tesla killers have been as constant and unfounded as Bob Lutz's call for Tesla's bankruptcy." He adds, "There is no Tesla killer. Competition is nowhere to be found... Tesla appears to be the only company that can actually produce and sell electric cars. If you would have shown us the below chart five years ago there is no way we would have ever believed it. It looks like it is the competition that is taking the Ambien."
Verdict: The chart above says it all. To punctuate this point on the earnings call, Elon Musk declared an electric vehicle edge that's become "very difficult for other companies to compete with Tesla [head-to-head] because we are [producing] the most efficient* car and [have] the lowest cost batteries." Therefore, "I do encourage our competitors to really make a huge investment, we've been saying that for a long time." But, "the fact of the matter is, we made the investment in the Gigafactory and other companies didn't."
*According to the Tesla's Shareholder Letter, "With Model 3, energy efficiency [has] improved dramatically to 4.1 EPA miles per kWh, the highest efficiency for any all-wheel drive EV. To put this in context, our current or upcoming AWD (2019) competition is expected to achieve 2.4 to 2.8 miles of EPA range per kWh."
Above: Galileo Russell provides a helpful overview and recap of Tesla's 3Q Earnings (Youtube: Hyperchange TV)