Fund Manager: The Wheels Are Coming Off Musk & Tesla

Dave Kranzler says Tesla continues to circle the drain, and now the wheels are quite literally coming off. Here’s why…

by Dave Kranzler of Investment Research Dynamics

Literally, the wheels are coming off. Panasonic, which supplies batteries that it manufactures for Tesla at the Gigafactory in Nevada announced that it was cutting back on its plans to expand production capacity at the plant. It also announced that it was suspending plans to produce batteries at Tesla’s planned Shanghai Gigafactory. In an article in a Japanese business publication, Panasonic had less than flattering things to say about working with Tesla. The move by Panasonic at the Nevada Gigafactory likely reflects concern over the falling demand for Teslas.

Tesla is sticking by its guidance to produce and deliver 360-400k vehicles in 2019. In Q1, Tesla delivered 63k vehicles – a 252k annualized rate. David Einhorn, the proprietor of the high profile Greenlight Capital hedge fund, is vocally short Tesla. His team believes Tesla will deliver less than 250k vehicles in 2019. Q1 and Q2 will likely have higher deliveries than Q3 and Q4 because of the temporary “bump” in demand from rolling out the Model 3 in Europe and China in Q1. I believe there’s a chance that deliveries in 2019 are closer to 200k than 250k.

This graphic shows the demand drop for the Models S&X combined in, Norway, one of Tesla’s largest markets (visit @teslacharts to see more well-produced analytic charts like this):

That chart looks similar or worse in all of Tesla’s markets, including the U.S. After a brief bump in deliveries from the effect from the start of delivering the Model 3 to Europe’s and China’s “must-have the latest tech device” crowd, the Model 3 chart will soon look like the delivery chart for the S/X. European’s are already complaining about the poor reliability and service on the Model 3.

Tesla also rolled out its leasing program, which left most analysts, including me, thoroughly baffled. The lease program ostensibly is primarily to boost demand for the Model 3. But Tesla does not offer a lease for the basic $35,000 Model 3. It also announced that the basic Model 3 would only be offered for online purchase. The lease for the Standard Range-plus Model 3 is structured such that the lessee will need to put down roughly $4k upfront. The lowest monthly payment option is $504 and there’s no purchase option at the end of the lease. I won’t go into Musk’s rationale for this because it would be a waste of your time to read about it. In short, the ill-conceived lease program will likely have a minimal effect on unit deliveries.

There’s three primary reasons Tesla’s sales are falling rapidly: 1) the 50% drop in the tax credit (which drops even lower to $1875 starting July 1st this year and goes away completely after December 31st);   2) Tesla’s growing reputation for poor reliability and even worse service;   3) Growing competition in the luxury EV space.

With each passing week, the operational decisions and musings of Musk become more bizarre. The growth narrative is over. The Company is shrinking its service centers and delivery infrastructure in order to cut costs. Senior employees are leaving pretty much on a weekly basis. In fact, last week the senior manager who was responsible for building Tesla’s lithium ion battery supply chain from May 2017 to April 2019 left the Company. Perhaps more troubling, Tesla’s Director of Global Treasury also left recently. This function of this position is to oversee the Company’s worldwide cash management and liquidity activities. It’s likely this person, Pedro Glaser, was not interested in sticking around until the cash runs out.

The Company continues to spiral downward in a toxic cloud of operational dysfunction, financial deterioration, decaying auto industry fundamentals and growing fraud. It remains a mystery to anyone who examines Tesla closely how the stock manages to remain at a level that assigns a $47 billion market cap to the Company. I suspect there’s a continuous short squeeze on the shares because the short-interest is quiet high and the “free” float of shares is low relative to the overall short-interest. Ultimately the shorts will prevail – of that I’m 100% confident.

In my view, Tesla continues to circle the drain. The stock is down nearly 20% YTD in the context of one of the most torrid upside moves in the overall stock market in history. The stock appears ready to test the $250 level again. If it drops below that, it could fall below $200 quickly.