March 17, 2019 - 6:50pm EST by
2019 2020
Price: 275.43 EPS -6.33 -6.68
Shares Out. (in M): 173 P/E 0 0
Market Cap (in $M): 47,567 P/FCF 0 0
Net Debt (in $M): 7,514 EBIT -584 -610
TEV ($): 55,081 TEV/EBIT 0 0
Borrow Cost: General Collateral

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  • hidden gem
  • Fraud
  • good summary
  • Wisdom by Katana
  • The lower the estimates the higher the share price
  • If the numbers suck just don't report them
  • Tilting at windmills
  • Fooling some of the people ALL of the time
  • I've never seen anything like this
  • Einhorn short
  • Will trade up on BK filing...
  • Poor management
  • T-Bill alternative
  • Twitter Meltdown
  • Directors resign en masse
  • Full Self Theranos
  • Used Car Dealer CEO
  • Cathie Wood goes 'all in'
  • Daily Email Leak


Tesla has been written up on VIC three prior times. A lot has changed since YCOMBINATOR most recently wrote up Tesla as a long in January 2018 (this being Tesla, a lot changes every week.) The prior write ups (and especially the message sections of those write ups) have very good analysis of the twists and turns of the Tesla story that have gotten us to the current situation and are definitely worth reading. Given the massive changes in the Tesla story in the past month I thought it was time for an updated short write up on TSLA.



Shorting Tesla stock (or buying put options, or shorting the unsecured bonds, or short MXWL stock, or shorting TSLA call options) is one of the most asymmetric risk/reward trades in financial markets since shorting subprime CDOs in June 2007. We believe Tesla’s stock price is on the precipice of a spectacular collapse. The company has hit a demand air pocket at the same time that its balance sheet is stressed by 2019 debt maturities. In a desperate attempt to raise cash and boost sagging interest in its products, in the last 2 weeks Tesla has opened up for sale the long awaited “$35,000” Model 3, unveiled the long teased Model Y, and dramatically lowered prices on most of its products. None of these efforts appear to be having a material impact on the company’s sales or financial condition. Despite being the least profitable, least efficient, highest worker accident, least solvent automaker, Tesla trades at a sizable multiple premium to its competitors. We believe this premium valuation is a product of TSLA shareholders’ near God-like devotion to CEO Elon Musk. With sell side estimates significantly above current business trends and the company already trading at a massive valuation premium to peers, upside in TSLA stock is severely limited at current prices.


Over the coming weeks and months, as the reality of the collapse in demand for the company’s cars is revealed, we expect Tesla’s retail and growth investor shareholder base to finally wake up to the reality that TSLA is a niche automaker with a limited addressable market. We would expect these shareholders to start to aggressively sell their shares in response to the unrelenting negative news flow over the next 8 weeks. Likewise, the inevitable resignation/firing/push out of Musk in reaction to his childish behaviour towards the SEC and other government regulators is likely to spook the retail investors who own TSLA stock because of their reverence for Musk. Selling by these shareholders should eventually push TSLA’s share price down to a level (we believe in the low $200s/share) to trigger Musk’s margin call causing a massive reset in TSLA’s share price (likely below $50/share.)


Furthermore, TSLA’s balance sheet is increasingly stressed by the company’s likely large Q1 loss as well as a sizable inventory build due to the company not planning for the Q1 demand air pocket. TSLA is subject to numerous lawsuits and government investigations which appear to be inhibiting its access to capital; the company has been unwilling or unable to raise external capital since 2017. If TSLA remains unable to access some sort of liquidity in the next few months, the company will likely have to appropriate customer deposits to remain in operation. Even if the company can get away with effectively “stealing” its customers’ deposits, TSLA will likely be unable to meet the $566 million convertible bond maturity due on November 1, 2019. TSLA is likely to do some sort of restructuring of its financial obligations before the end of the year. Equity holders are likely to be significantly diluted if not completely wiped out.

Capital Structure


Share Price


Shares Outstanding


Mkt Cap



Unrestricted Cash


Restricted Cash


Total Cash



Customer Deposits



Recourse Debt


Non-Recourse Debt



Net Debt







For the purpose of this illustration, we are not including the Panasonic purchase obligations, the likely need for a larger warranty reserve, potential product recalls, the breakage cost for the Buffalo Gigafactory, other purchase obligations, retail lease breakage payments, or legal liabilities from the various lawsuits and regulatory investigations Tesla is involved in. We did not include the ~$510 million Shanghai gigafactory bank debt facility in this calculation of EV.


It is also worth noting that Tesla moved $610 million in cash into its Singapore subsidiary on February 11th. We believe this money represents the anticipated equity investment Tesla will have to make in the construction of the Shanghai Gigafactory and to a certain extent is the effective collateral for the company’s Shanghai gigafactory construction loan and likely has been subsequently wired into Tesla’s Chinese subsidiary. We believe it is near impossible for Tesla to access this cash outside of China.  



It is also worth noting that TSLA’s Singapore subsidiary uses a local auditor and not PWC.


In addition, Tesla bonds currently trade near 52 week lows.



Puppyeh has done a good analysis of potential recoveries for unsecured creditors in the event of a Tesla bankruptcy. They are not pretty. Puppyeh’s analysis can can be found here https://rapercapital.com/2019/03/04/tesla-unsecured-debt-recovery-tops-out-at-30c-if-youre-lucky/


Q1 Demand a/k/a “Demand Hell”


The step down in the Federal tax subsidy for Tesla cars at the beginning of 2019 as well as changes in electric vehicle subsidy programs in other countries (most notably The Netherlands where the electric subsidy starting Jan 2019 only applies to electric cars with sub €50,000 prices), have significantly reduced demand for Tesla cars in 2019. Trying to meet Q4 2018 Wall Street Model 3 vehicle delivery estimates (which Tesla barely missed), Tesla pulled forward most of its U.S. demand for the Model 3 into 2018 (including by offering generous discounts to employees of Tesla and Spacex to purchase the car in Q4 and allowing Tesla AND Spacex employees to exchange vacation days towards the purchase of a car) which has exacerbated the subsidy step down related demand air pocket. Note: Tesla does not disclose any related party transactions between Tesla and Spacex in any of its SEC filings. I’m not sure how a related party subsidizing its employees to purchase your product isn’t a related party transaction.





In their 10-K, TSLA admitted that the tax credit expiration pulled demand forward into 2018.


For example, under current regulations, a $7,500 federal tax credit that was available in the U.S. for the purchase of our vehicles is being reduced in phases during, and will sunset at the end of, 2019. We believe the first reduction in this tax credit may have pulled forward some near-term demand in the U.S. into 2018, and could create similar pull-forwards in 2019 before each further step reduction in the federal tax credit. Moreover, in July 2018, a previously available incentive for purchases of Model 3 in Ontario, Canada was cancelled and Tesla buyers in Germany lost access to electric vehicle incentives for a short period of time beginning late 2017. In April 2017 and January 2016, respectively, previously available incentives in Hong Kong and Denmark that favored the purchase of electric vehicles expired, negatively impacting sales. Effective March 2016, California implemented regulations phasing out a $2,500 cash rebate on qualified electric vehicles for high-income consumers. Such developments could have some negative impact on demand for our vehicles, and we and our customers may have to adjust to them.”

U.S. demand for the Model 3 has been particularly tepid quarter the date in Q1 2019. According to estimates by industry publication insideevs (which is usually high in its estimates), Tesla has sold 12,250 Model 3s, 2,050 Model X, and 1,675 Model S quarter to date through February. To put these numbers in perspective, according to InsideEvs, Tesla sold 25,250 Model 3, 4,100 Model X, and 3,250 Model S in December alone.



A similar ~75% drop in Model 3 registrations is evidence in NY state vehicle registration data.



In addition, through the first two weeks of March there has been no noticeable change in the number of cars applying for rebates under California’s electric vehicle subsidy program. This level of electric vehicle demand remains well below Q4 2018 levels.


Source: https://twitter.com/BonaireVolt/status/1106232736136773632

Coming into Q1, Tesla believed that Model 3 demand in Europe and China would offset the demand air pocket in the U.S. That said, European and Chinese demand have massively underwhelmed expectations. While analysts (and likely the company) were expecting Tesla to sell over 25k Model 3s in Europe in Q1 2019, real time data suggests the company is trending towards sales closer to 10k vehicles. Through yesterday in Norway, the Netherlands, and Spain (the European markets with daily registration data) combined Tesla has sold 3,821 Model 3, 457 Model X, and 291 Model S quarter to date. Note: in 2018 the Netherlands was Tesla’s largest market in Europe and Norway was Tesla’s second largest market in Europe.

Source: eu-evs.com


To put these numbers in perspective, TSLA sold 3,250 Model S and 2,507 Model X in these markets in Q4 2018 (Tesla only began selling the Model 3 in Europe in Q1 2019.) Given the massive step down in Model S and Model X sales in these markets, clearly Model 3 sales are having a major impact on sales of these higher margin vehicles.


In addition, through February, TSLA has sold 1,229 vehicles in Germany (over 1,000 of these were Model 3s). Tesla sold 289 vehicles in Germany in Q4 2018.






In China, until a few days ago, all of Tesla’s shipments of Model 3s into the country were being held up by customs due to issues with their car stickers not being in Chinese. Bloomberg reported on March 6th that 4,678 cars had this issue (https://www.bloomberg.com/news/articles/2019-03-06/tesla-may-have-nearly-4-700-model-3-cars-held-by-china-customs ) which likely represents all the model 3s that have arrived in China in the first 4 boats that arrived in China. Given the time needed to process orders these cars likely represent the upper limit of potential Model 3 sales in China in Q1.


On Saturday, Musk seemed to be preparing the market with an excuse for the big Q1 miss in Europe and China citing logistics issues.



The reality is Tesla has 2 more ships on the open water heading to Europe (perhaps ~3,000 cars) and 4 ships on the open water heading to China (perhaps 6,000 cars.) These ships may not arrive in time to allow vehicles on these ships to be delivered in Q1. In its Q4 2018 earnings letter Tesla did write that it expected a roughly 10,000 vehicle increase in “in transit” inventory.


Source: https://docs.google.com/spreadsheets/d/10Uh_GSkShwPPlrE5mOJcrkZ-T3NmLkLnTo6xqbdtaOI/edit#gid=0


Also, based on aerial reconnaissance taken this weekend, Tesla is not currently preparing any more ships for departure.


Source: https://twitter.com/Paul91701736/status/1107144779261853696


Tesla entered Q1 with excess production over deliveries of roughly 10k Model S/X and 8k Model 3s. Having misplanned demand, Tesla has likely produced over 20k more Model 3s than it will likely deliver in Q1 and over 5k Model S/X than it will likely deliver. “New” cars lose their value the longer they sit on a lot unsold. Anecdotal reports on Twitter and various Tesla Motor Club Forums show people being delivered 2018 Model 3s even here in March.

Source: Goldman Sachs


The unplanned inventory build has stretched Tesla’s financial liquidity and caused the company to scramble to liquidate this rotting inventory and raise cash. Since the end of February, Tesla has frantically changed its pricing with steep pricing cuts on its highest margin model S and model X configurations as well as the introduction with no fanfare of the long anticipated “$35,000” model 3SR. The company has also lowered and then raised the price of its vaporware full self driving package. This round of price cuts was the third time this year that Tesla has cut prices on all of its models. In this most recent round of pricing cuts, Tesla dramatically slashed the prices of its highest margin configurations of the Model S and Model X.



Under the new pricing, the exact same car received a massive price cut.


As demand has continued to be soft Tesla has further discounted slow moving 2018 Model year inventory.


Source: https://twitter.com/KawasakiKR11/status/1107046485563199489


In addition, Tesla is currently running a “limited time” 3% off sale until March 18th. With the company claiming 2 week delivery times for anywhere in the U.S. a sale ending on the 18th is clearly an attempt to drive Q1 2019 deliveries and salvage the quarter.


Source: https://twitter.com/elonmusk/status/1107026609268113408


In addition, Tesla changed its purchase policy to allow customers to take possession of a vehicle for up to 7 days and be able to return it. Of course this would require Tesla to be prompt in its repayment (there are horror stories of how it can take Tesla months if not over a year to repay depositors or customers who are owed refunds) or the customer will be paying interest on their car loan. It’s also not abundantly clear where someone would return a purchased car with Tesla in the process of closing down most of its store fleet.

Source: https://twitter.com/elonmusk/status/1107029046095810561


Source: https://twitter.com/elonmusk/status/1107038036913610752


As we approach the end of Q1, pricing for “new” Tesla vehicles continues to fall. Read this recent Tesla Motors Club forum on the types of discounts that are currently being offered and the rapidity with which prices are collapsing. Tesla is conducting an everything must go fire sale!





Currently there is significant new inventory of Model S and Model X listed for sale on Tesla’s website for most of its major markets. It is worth noting that while Tesla was originally a build to order company in 2018 in order to solve “production hell” Tesla switched to large scale batch manufacturing of various configurations of each model (paint color, interiours, et cetera.) The consequence of this strategic decision is that Tesla ends up with excess production of unpopular configurations.


Source: https://teslainventory.teslastats.no/


If you go on twitter there are pictures of random parking lots across the country filled with Model 3s.


Near Boston, 3 days after a snowstorm.


This entire parking garage in Los Angeles is filled with unsold Tesla inventory.



At the Manheim Auction yard in San Diego


Source:  https://twitter.com/GreatPaulSmith/status/1104821605279031296


At another random parking lots in San Diego

Source: https://twitter.com/GreatPaulSmith/status/1104582661908004864


In Burlingame, CA near a Tesla store


Source: https://twitter.com/PlainSite/status/1103389414879682560


At the Swiss airport


At a random parking lot in Tempe, AZ


Source: https://www.dropbox.com/s/s581wz3n62wzvua/Tempe.MOV?dl=0


This random parking lot in Dallas


Source: https://twitter.com/CovfefeCapital/status/1107372133661982723


And even at the company’s corporate headquarters requiring employees to park at a satellite lot and take a bus to the office.


Source: https://twitter.com/Paul91701736/status/1095748473452818432


In an effort to move this metal Tesla has removed the “medium range” configuration of the Model 3 from its website. We believe the 3SR+ is just a software limited reconfiguration of existing 3MR inventory and that Tesla removed the MR option to make it easier for the company to just sell existing 3MR inventory to buyers of the 3SR+.



These price cuts are likely to significantly reduce automotive gross margins in 2019. Analysts at Barclays reduced their gross margin estimates by over 500bps in response to the price cuts.



Tesla hoped that the launch of the Model 3SR and the Model 3SR+ would reinvigorate demand and drive significant deposits into the company. However, with the delivery window for the Model 3SR only expanding from 2-4 weeks to 6-8 weeks and the delivery window for the Model 3SR+ only expanding from 2 weeks to 2-4 weeks there were at most 10,000 orders for the “$35k” Model 3. Tesla only produced 550 Model 3SR over 2 days in its initial batch of production suggesting that total orders are likely materially below 10,000. We believe Musk was expecting over 100k deposits for the Model 3SR.




In addition, Tesla has done several rounds of mass layoffs and tried unsuccessfully to close down all of its store base in an effort to conserve cash. In a sign that the company is currently doing very little financial and strategic planning, Tesla had to backtrack within a week of announcing the closure of its store fleet when it discovered that it would have to pay hundreds of millions of dollars to landlords in order to break its store leases.


We believe another major cause of the recent decline in Tesla demand has been the enormous erosion in consumer perception of the Tesla Brand. Between screwing over Model 3 depositors to the constant circus surrounding Musk and the numerous service and product reliability issues, public perception of the Tesla brand has soured.




Assuming Tesla is able to sell 42,000 Model 3s in Q1 and 164,500 Model 3s in 2019 as well as 17k Model S/X in Q1 and 87,000 Model S/X for 2019, along with expected margin compression from the lower prices, we estimate Tesla will report EBITDA of around $1.6 billion in 2019. On our 2019 EBITDA estimate, TSLA is trading at over 34x EBITDA versus other auto OEMs which trade with low to mid single digit EBITDA multiples. Our revenue and delivery estimates could be off by a little if Tesla’s frantic end of quarter sales discounts are able to stimulate sufficient demand to clean out a sizable chunk of inventory. The sale of these cars at little to no gross margin likely wouldn’t have a material impact on our EBITDA estimates.



The Model Y unveiling


When initial deposits for the newly launched Model 3SR/3SR+ came in way below expectations, within a few days of its launch, Tesla pivoted and announced it would unveil and take deposits for its crossover utility vehicle the Model Y.


In the 35 minute Model Y unveiling event, Musk spent only 6 minutes talking about the new car. The rest of the event was spent giving a history of Tesla and seemed to me to be basically an infomercial for the company’s other products if not Musk’s farewell speech. (Even some in the media is openly speculating that this event may have been Musk’s last https://www.thestreet.com/markets/does-tesla-model-y-presentation-suggest-elon-musk-is-out-as-ceo--14897925 )


The Model Y that was unveiled had a stark resemblance to a Model 3 with only a few modest changes.


Source: https://twitter.com/David_Kudla/status/1106535423445254149




Musk seemed thoroughly uninterested in the unveiling event and didn’t even bother to demonstrate the hatch opening or the 3rd row seats, the only 2 features of the Model Y which differentiate its functionality from the Model 3. People who test drove the car after the event clearly noticed that the 3rd row seats would not fit any adults. https://www.youtube.com/watch?v=TL06MxVDH4M&feature=youtu.be&t=384


During most test rides, Tesla kept the third row seat folded down so riders wouldn’t be able to see that the third row isn’t designed to fit adults. Perhaps this is why one of Tesla’s senior engineers resigned right after the Model Y unveiling was announced (https://www.linkedin.com/in/dr-michael-schwekutsch-a75b0310/ .) Dr. Schwekutsch posted a resignation on linkedin displaying his access badges to Tesla’s prior product unveilings, a not so subtle hint that his decision to leave Tesla was directly related to Musk’s decision to unveil the Model Y before the product was ready.


Source: https://www.linkedin.com/in/dr-michael-schwekutsch-a75b0310/


According to Insideevs.com, the white Model 3 on display wasn’t a functioning car and a simple one-handed push by an employee was able to move the car several feet.





Neutral car publications roundly panned the Model Y.








The lack of innovative features in the Model Y and especially the failure to reveal any other novel innovation at the event suggests that either the Model Y unveiling event was rushed as a desperate attempt to launch a cash grab for deposits or a reflection of the lack of innovation at Tesla as the brain drain of massive executive departures starts to take its toll on the company,  


Tesla did not reveal where it would manufacture the Model Y but has started to take deposits for the car with an expected delivery date in late 2020.


Tesla had 2 Model Ys at the unveiling event. The car that was not on stage appears to have been a clay model. Notice how tight the panel gaps are. Tesla’s Model Y unveiling event introduced a product almost as real as its fake solar roof product that it “unveiled” on a fake house on the set of Desperate Housewives. (A good history of the solar roof fraud -- a product which Tesla still takes deposits for on its website even though its almost 3 years since its unvieling and still doesn’t really exist can be found here https://mansionengineer.com/2019/02/04/elon-musk-tesla-and-the-solar-roof-tile-fraud-update/ )


Source: https://twitter.com/phoennix10/status/1106895504976154624


The 2 Model Ys Tesla had at the event were not even the same design. For example, note how the panel gap where the hatch and back of the car meet.


Source: https://twitter.com/eisgarr/status/1107144143392772096


Even the sycophantic pro-Tesla “media” understood the Model Y event as a pure cash grab.





Notice the complete lack of any social media buzz around the Model Y. Notice the almost complete silence from Musk about the product since its launch on Thursday night. It seems readily apparent that the Model Y has been a total bust. According to data from Google, the Model Y unveil had dramatically lower search interest than the Model 3 reveal in March 2016.


Source: Google Trends


Narrowing down to the last 12 months, search interest for the Model Y barely reached the base level search interest that occurred 2 weeks prior with the announcement of the Model 3SR launch. Given similar levels of search interest it appears that potential deposits for the Model Y are a similar order of magnitude to the deposit/ordering activity for the Model 3SR or around 10,000 (though to be conservative and since placing a $2,500 deposit is less of a financial burden than outright purchasing a car we estimate that TSLA was able to receive about 25,000 orders for the Model Y.)



With the Model Y unveiling roundly panned, and the company likely receiving fewer than 25,000 reservations for the product, within 48 hours of the Model Y reveal, Musk again pivoted to his next hustle by talking up the “Cyber Punk” Tesla pickup truck.

Source: https://twitter.com/elonmusk/status/1106714774694297601


In addition, Tesla is taking up to $200,000 deposits for its class 8 truck product the “Tesla Semi” which it unveiled in 2017 and still hasn’t picked a manufacturing site where it will be produced.




With near daily changes to its product pricing, as well as half assed product reveals, Tesla does not appear to be operating with any long term strategic plan. Raising any amount of cash in any way possible seems to be the only business imperative at this point.


Liquidity Hell a/k/a Balance Sheet Stress


Tesla is in effect a modified Ponzi scheme. Throughout its history, the company has financed its operations by announcing a new product (originally the roadster, then the Model S, the Model X, the Model 3, the Semi, the roadster 2, and now the Model Y as well as the vaporware full self driving package) and then taking deposits for the product before it has ever designed a production system for the product. The company then spends the deposits on operating expenses and the capital expenses to manufacture the original product. When the company is close to running out of funds, the company announces a new product and takes deposits on it in order to finish the production of the first product. Since 2008, 78% of TSLA’s cash flow from operations has come from customer deposits!



Unlike a bank, Tesla does not segregate customer deposits and in reality customer depositors are just unsecured creditors of the company. In Ashlee Vance’s Elon Musk biography he has a telling scene where in late 2008, Kimbal Musk worries about the legal implications of Elon raiding the customer deposits in order to keep the lights on.





With a sharp demand slowdown as well as the $920 million convertible bond maturity Tesla paid on March 1st, Tesla’s balance sheet is in an increasingly perilous position. We believe the ongoing Department of Justice investigation into potential securities and wire fraud related to Model 3 production statements prior to the company’s 2017 high yield offering as well as the SEC’s ongoing litigation with CEO Elon Musk over the “Funding Secured” debacle have likely blocked the company’s ability to do a registered equity offering. The MXWL merger proxy is taking a surprisingly long time to be declared effective. It’s almost as if the SEC is refusing to approve any registration statements for the company so long as Musk remains CEO. The poor performance of Tesla’s high yield bonds has likely limited the company’s potential access to that market. In theory, Tesla could do some sort of private placement in its equity, but we believe Musk has been unwilling to pursue this path since the likely pricing of such an offering would trigger his margin call and wipe him out personally.


Assuming the company sells ~17k Model S/X, 42k Model 3s, is able to extend payables to 105 days from 87 days in Q4, raises $50 million in Model Y/Semi/Roadster 2 deposits, spends $3 billion on capex over the course of 2019 ($500 million of which is funded by drawing on the China credit facility) we estimate Tesla will end Q1 with consolidated cash on its balance sheet of a little over $1.6 billion. When you adjust this cash balance for the ~$600 million likely trapped in China (according to the 10-K Tesla had $749 million in cash outside the U.S.), we estimate Tesla ends Q1 with only roughly $1 billion in on balance sheet cash accessible in the U.S. compared to over $800 million in consumer deposits. The company will likely have to raid those consumer deposits in Q2 in order to remain outside of Chapter 11. Here is how we have modeled Tesla’s balance sheet:



Even these numbers may prove to be aggressive. The FT had a good recent article which speculated that Tesla’s real cash position was likely materially lower than their reported cash balance.




Solarcity has a $180 million term loan maturity due in April and Tesla has a $566 million convertible bond maturity due November 1st. Absent a new capital raise, Tesla is unlikely to have sufficient cash on hand to pay the November maturity. It isn’t clear whether or not Tesla has sufficient liquidity at the Solarcity subsidiary level to pay off the April term loan maturity. In theory TSLA could bankrupt its Solarcity subsidiary, but that may cause a crisis of confidence among the company’s other creditors.


Using our assumption outlined earlier, we estimate Tesla will burn $1.4 billion in Q1 and close to $4 billion in 2019.  



Tesla’s tight liquidity position is having a material impact on its operations. For example, Tesla has had difficulty meeting payments to local utilities to allow its superchargers to operate. For example, this recently constructed supercharger location in New Jersey has yet to open because Tesla hasn’t paid the local utility for electricity.



Needless to say, Tesla’s tight liquidity position appears to be the clear motivator for Musk’s endless pumping of the stock, massive price discounting on the company’s cars to move metal, and frantic half assed reveals of new products designed only to raise more deposits.


If Moody’s or other ratings agencies downgrade Tesla’s debt it is likely that suppliers would tighten payables terms and exacerbate the company’s liquidity crisis. Tesla needs the ability to extend payables until there is an inflection in product demand.


If potential customers start to suspect that Tesla has material balance sheet issues and may no longer be a going concern, this sentiment change could exacerbate the company’s demand problems. Lenders are unlikely to finance leases on cars of a near insolvent automaker (as residual values would plummet in a chapter 7 scenario) and customers would be afraid to purchase the cars of a company that may not be able to provide additional over the air software updates let alone produce replacement spare parts, continue to operate supercharger stations, or offer vehicle warranties.


Musk’s Legal Issues


After committing blatant securities fraud over the summer by claiming that he had “Funding Secured” to take Tesla private at $420/share, and after the SEC attempted to bar him from being a director or officer of a public company, Musk and the SEC entered into a settlement agreement. Under the terms of the settlement, Tesla’s board of directors had to appoint someone that was not unagreeable to the SEC to pre-approve and oversee Musk’s public communications (including his twitter account.)


Since he signed the settlement agreement with the SEC, Musk has been taunting the agency calling them the “Short Seller Enrichment Commission” (https://www.cnbc.com/2018/10/04/elon-musk-mocks-sec-as-shortseller-enrichment-commission-days-after-settlement.html) and telling 60 Minutes that he does not respect the SEC (https://www.youtube.com/watch?v=cRNypdYQoWk )


On February 19th, Musk tweeted that Tesla will produce around 500k cars in 2019. This compared to the company’s official guidance for deliveries of 360k to 400k provided in its Q4 2018 quarterly letter. Presumably after a frantic conversation with TSLA’s “twitter sitter,” Musk updated his comment to clarify the comment.





The SEC immediately sent TSLA a request for information relating to the process that was involved in the crafting of this tweet as well as what talking point Tesla had developed for its production guidance and whether or not there had been any changes. Based on Musk and Tesla’s lawyer’s responses it was revealed that Tesla’s “twitter sitter” had never pre-approved any of Musk’s communications and that Musk didn’t request such pre approval before making the comment on February 19th.


The SEC is no longer pursuing this case out of its San Francisco regional office and instead is using the resources of its headquarters in Washington, D.C. The lead litigator for the SEC Cheryl Crumpton is a former assistant U.S. Attorney who worked under Rod Rosenstein for 5 years. (https://www.linkedin.com/in/cheryl-crumpton-7521467 ) By having a very senior person litigating this case, the SEC is demonstrating that it is very focused on this case.


In response to the SEC, Musk claimed that it was violating his first amendment rights by subjecting his communications to a pre-approval process. Of course, Musk agreed to such a process when he signed the settlement agreement in late September, so this argument is complete nonsense.


The SEC will file their response to Musk’s response next week. We expect it to be quite damning. While the legal process will take time, we believe it is highly likely that Musk and perhaps Tesla will be found to be in contempt of the original settlement that had been approved by the court. Simplistically, Musk agreed to a process for his public communications and then he didn’t follow it. The case is actually fairly cut and dry. The SEC will almost certainly push for Musk to get a multi-year director and officer ban for his repeated securities law violations; any lessor remedy at this point would make the SEC look feckless.


Based on his repeated childish behavior in dealing with securities regulators, Musk is highly likely to either resign, be forced out by Tesla’s board, or forcibly removed as a director and officer by the judicial system.


You can follow the latest filings in this court case here:



Many of Tesla’s shareholders own its stock because of their faith in Elon Musk. We believe his removal from the company will likely cause a sharp negative reaction in the stock price.


Anton Walhman has a very good blog post on the implications of the recent filings in the SEC’s case vs. Musk that is well worth the read. https://seekingalpha.com/instablog/200447-anton-wahlman/5282752-elon-s-last-days .


Safety Issues


While Musk likes to tout the very good crash test ratings of Tesla vehicles, Tesla cars have a disproportionately high fatality rate relative to other luxury automakers. This analysis from over the summer did a very good job in analyzing the relative safety of Tesla to other luxury auto OEMs.




You can follow the known Tesla involved fatalities on this website




In late February, there were 2 separate fatal Tesla car crashes within 20 miles of each other in Southern Florida. The NHTSA and the NTSB have opened investigations into the safety of the company’s cars and the specifics of these crashes. One of these crashes related to the vehicle’s suspension breaking causing the front driver side wheel to fall off causing the car to lose control and crash into a tree while the other crash involved a car on autopilot attempting to drive under the trailer of a Class 8 truck at a high speed causing the car and its driver to be decapitated.








In 2016, a similar autopilot related accident to last month’s Delray Beach accident occurred in Florida. A different Tesla on autopilot drove into a turning class 8 truck at full speed attempting to drive under the truck’s trailer. The NHTSA conducted a study (released on the last day of the Obama administration) that didn’t find issues with autopilot (https://static.nhtsa.gov/odi/inv/2016/INCLA-PE16007-7876.PDF ) In perhaps the most scandalous development in the Tesla saga, the Quality Control Systems Corporation which used a FOIA request to obtain the data underlying the 2017 NHTSA study, discovered that the NHTSA had doctored its data and analysis to make Tesla’s autosteer capability appear to be more safe than it actually is. QCSC concluded that autopilot increased the probability of an airbag having to be deployed based on a customer’s use of autopilot by 59%. The press is starting to catch on to this potentially large government corruption scandal.









Perhaps in response to the new investigation into Autopilot, Tesla has dramatically changed the language on its website related to its vehicles full self driving capabilities. The new language drops all mention of the nonexistant Tesla Network (essentially the Tesla robo taxi idea that customers could rent out their cars when they were not in use to go around and act as robo taxis for other people.) It is worth noting that several sell side analysts have ascribed meaningful percentages of their price targets to the Tesla Network even though it doesn’t exist and now seems even less likely to ever exist.






I think it's also worth pointing out that SuperCruise by GM (their version of autopilot that is geofence restricted to use on interstate highways and is standard on all Cadillacs) hasn’t been involved in a single crash let alone any fatalities.




In addition, Tesla cars have a high propensity to explode in the event of a high speed collision. Basically any collision where there is damage to the under carriage has a large fire risk. Tesla uses cylindrical lithium ion battery packs which are much more likely to explode than the solid state lithium batteries used by other major Auto OEMs like Audi and Porsche for their electric vehicle models. A government mandated battery recall would likely bankrupt Tesla.


In response to numerous complaints about poor manufacturing quality and the very long wait times for spare parts and repairs, Consumer Reports removed its reliability rating for the Model 3.




Meanwhile according to Forbes, TSLA’s Fremont factory has had 3x the reportable incidents and fines than the largest U.S. auto plants of the 10 largest U.S. automakers combined. Tesla’s Fremont factory remains non-union.




In addition, Tesla has had an extraordinarily large number of fires at its Fremont factory. The most recent fire was in late February. This was the 7th fire in the last 2 years, 5th in the last 18 months and at least twelfth in the past 4 years.







Musk’s personal finances


Meanwhile, Musk appears to be very tight on personal liquidity at the moment. According to Bloomberg, at some point in 2018, Musk asked Morgan Stanley if he could borrow against his Spacex shares (they refused.) In December, after Spacex’s attempt to raise $750 million in new equity had failed, Musk was forced to find the money to prop up Spacex’s stretched balance sheet. The WSJ’s revelation that Musk had embezzled almost $100 million from Spacex to pay for the Boring Company’s demonstration tunnel had turned off other possible sources of capital. Desperate to find money fast, Musk mortgaged five of his California homes to for over $61 million in the middle of December (https://www.bloomberg.com/news/articles/2019-02-22/elon-musk-turns-to-morgan-stanley-for-five-monster-mortgages )

In January, Musk did a ~$50 million sale/leaseback transaction on his prized corporate jet. (I highly recommend reading this analysis of Musk’s actions in December as it puts the pieces together very well  https://www.sutori.com/story/collateral-secured-elon-musk-hawks-houses-after-boring-tears-spacex-new-hole--LTF6cSmx9WZvVn8mCtQ2MsPb  )

Mortgaging homes and selling airplanes on a moment’s notice are not the actions of someone who has his financial house in order.

Musk’s massive (>$1 billion) margin loan on his TSLA stock has been used to finance his personal empire (houses, planes, Spacex, Boring company, et cetera) Musk likely has tapped out his ability to borrow further against his TSLA shares since presumably he would have margined more shares before mortgaging his house (we will know more when the proxy comes out.) Therefore, Musk cannot afford for the TSLA share price to crash. While Musk has additional shares he could in theory pledge against his margin loan it is not abundantly clear that the board would allow him to lever up further. We believe at present Musk’s margin loan would force him to be margin called if the share price falls to around $210/share. That said, the market does not know where exactly this margin call share price is which could make triggering the margin call a self fulfilling prophecy. As the stock price drifts lower towards this margin call level, the risk for traders looking to “buy the dip” grows exponentially and they may just choose to step away from the market lest they risk being exposed to a discontinuous drop in the share price.


We believe Musk is perilously worried about his margin loan getting called and is desperate to distract attention away from the company’s demand problems by any means necessary. We believe his personal financial position has driven the frantic pace of new pumps by Musk and half assed product unveilings.

Aggressive Accounting


While there are many examples of relatively aggressive accounting in TSLA’s 10-K (a document where the word “ramp” appears 53 times) here are some of the more notable examples of Tesla’s aggressive accounting.


A. They use lease accounting for their Panasonic relationship and some other suppliers of the Gigafactory. In 2018 they added $766.6 million to this effectively deferred capex payments line item on the balance sheet. This must be how they have “reduced” their capital expenditures.


Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey to us the right to use, as defined in ASC 840, Leases, their production equipment, we consider them to be leased assets when production commences. This results in us recording the value of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to financing obligations. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we will apply similar accounting. During the year ended December 31, 2018, we recorded $766.6 million on the consolidated balance sheet.


There is $1.24 billion that has been capitalized cumulatively in this manner


Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey to us the right to use, as defined in ASC 840, Leases, their production equipment, we consider them to be leased assets when production commences. This results in us recording the cost of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and capital leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we have applied similar accounting. As of December 31, 2018 and 2017, we had cumulatively capitalized costs of $1.24 billion and $473.3 million, respectively, on the consolidated balance sheets in relation to the production equipment under our Panasonic arrangement. We had cumulatively capitalized total costs for Gigafactory 1, including costs under our Panasonic arrangement, of $4.62 billion and $3.15 billion as of December 31, 2018 and 2017, respectively.

B. They capitalized $121.2 million of inventory cars into pp&e calling these “fleet cars” “service loaners” on a long term basis. $48.4MM of this was done in Q4 and $72.8 million was done in Q3. If you assume these inventory cars have a similar mix to the 2018 sales (i.e. a cost of goods of around ~$55k) this would imply that tsla capitalized about 2,200 cars in 2018 as “service loaners.” It seems quite likely that these cars where lemons that were rejected by Tesla customers upon delivery and would have otherwise had to be significantly written down.



C. An accounting change added $58.4 million to the customer deposit line item on the balance sheet in 2018. Even with this benefit deposits fell.


Customer deposits primarily consisted of cash payments from customers at the time they place an order or reservation for a vehicle or an energy product and any additional payments up to the point of delivery or the completion of installation, including the fair values of any customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposit amounts and timing vary depending on the vehicle model, the energy product and the country of delivery. In the case of a vehicle, customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. In the case of an energy generation or storage product, customer deposits are fully refundable prior to the entry into a purchase agreement or in certain cases for a limited time thereafter (in accordance with applicable laws). Customer deposits are included in current liabilities until refunded or until they are applied towards the customer’s purchase balance. As of December 31, 2018 and December 31, 2017, we held $792.6 million and $853.9 million, respectively, in customer deposits.

Due to the adoption of the new revenue standard, customer deposits now include prepayments on contracts that can be cancelled without significant penalties, such as vehicle maintenance plans, which were previously reported as deferred revenue. As a result, the adoption of the new revenue standard increased the customer deposits balance as of December 31, 2018 by $58.4 million as compared to what the balance would have been under ASC 605, Revenue Recognition (see Note 2, Summary of Significant Accounting Policies).


D. Harris Kupperman did a good job of outlining other examples of aggressive accounting in his recent blog post




Other Issues

A. Executive Turnover

Executive turnover at Tesla has been ramping on a stepped exponential in recent months. Turnover has been especially concentrated in the legal and finance departments with the recent high profile departures of former General Counsel Dane Butswinkas and former longtime CFO Deepak Ahuja. You can find a list of the recent Tesla executive departures here. According to Reuters 40 “top” TSLA executives have left since 2016 while Yahoo Finance pegs the number at 88 in 2018 alone.









Leaked emails show that Musk must approve all hires at Tesla.   



Interestingly, Tesla’s newly promoted Chief Financial Officer and Chief Accounting Officer were internal promotions and not external hires. The new CFO has little work experience outside of Tesla.


“Pursuant to its prior announcement, on March 13, 2019, Tesla, Inc. (“Tesla”) appointed Zachary Kirkhorn as its Chief Financial Officer to succeed Deepak Ahuja. Mr. Kirkhorn, 34, first joined Tesla in March 2010 and has continuously served in various roles in its finance department other than a two-year period between 2011 and 2013 during which he obtained his M.B.A. from Harvard Business School, including most recently as Vice President, Finance, Financial Planning and Business Operations since December 2018. In connection with the appointment, Mr. Kirkhorn will receive a stock option grant of $12 million and a restricted stock unit grant of $4 million, which will be granted and will vest over four years in accordance with Tesla’s standard equity policies.

Also on March 13, 2019, Tesla appointed Vaibhav Taneja, Tesla’s current Corporate Controller since May 2018, as its Chief Accounting Officer. Mr. Taneja, 41, previously served as Tesla’s Assistant Corporate Controller between February 2017 and May 2018, and as Vice President of SolarCity Corporation in its accounting functions between March 2016 and February 2017 as well as its Corporate Controller from August 2016. Prior to that, Mr. Taneja was employed at PricewaterhouseCoopers in India and the U.S. between July 1999 and March 2016, including most recently as a Senior Manager in its Assurance practice. In connection with the appointment, Mr. Taneja will receive a stock option grant of $6 million and a restricted stock unit grant of $2 million, which will be granted and will vest over four years in accordance with Tesla’s standard equity policies.”


B. Insurance Hell


Due to the lack of available spare parts, Tesla cars are increasingly becoming expensive if not outright impossible to insure. Insurance companies are resorting to totalling Teslas that only have minor damage consistent with a fender bender. Here are some examples of Tesla cars being junked on salvage company websites like Copart and IAA that have damage consistent with a minor fender bender.








With little to no replacement parts and service times that can take many months, Tesla vehicles have started to become uninsurable. For example, Allianz has stopped underwriting any auto insurance policies in several European countries on Tesla vehicles ( https://twitter.com/Polixenes13/status/1106544413155753984 )


C. Insider Selling


In recent weeks, insiders have been aggressively selling shares.


Director Antonio Gracias sold 16,780 shares on March 12-13




Automotive President Jerome Guillen sold 1,000 shares on March 1




Chief Technology Office JB Straubel sold 15,000 shares on February 28th




Director Brad Buss sold 19,271 shares on February 14th




Director Linda Johnson Rice exercised and sold all of her vested 2024!!!! maturity options for only $731 of profit!




D. Gigafactory Issues


The Panasonic executive in charge of the Gigafactory was pushed out at the end of February. When according to Musk, Tesla was “single digit weeks away from going bankrupt” in early Q3 2018, Panasonic agreed to restructure its gigafactory contract to push contractual take or pay commitments due in 2018 into 2019.




You can see the impact of Panasonic’s restructuring of Tesla’s purchase agreement by looking at the $2.58 billion increase in 2019 purchase obligations as reflected in the 2018 10-K versus the 2017 10-K (including a $1.2 billion increase in purchase orders under binding and enforceable agreements primarily related to the purchase of lithium ion cells produced by Panasonic at Gigafactory 1.)


The 2018 10-K

The 2017 10-K



Given Tesla’s reduced vehicle demand, these take or pay arrangements for fixed quantities of batteries are a significant liability of the company.


E. The bizarre story of Martin Tripp and other issues at the Gigafactory

Bloomberg wrote a damning piece on the lengths Musk was willing to go to shut up a whistleblower. Long story short, Musk called in a fake active shooter tip to the Storey County, NV police and tried to have the whistleblower assassinated by the cops.




In addition, last week a second whistleblower came forward to corroborate allegations that Tesla has been illegally wiretapping its employees’ phones.














F. DOJ Investigation


Tesla remains under an active criminal investigation for misrepresentations of the company’s production guidance for the Model 3 at the time Tesla was conducting its $1.8 billion high yield debt offering.












This is how it is described in their 10-K


We are cooperating with certain government investigations as discussed in Note 17, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Aside from the settlement with the SEC discussed below relating to Elon Musk’s statement that he was considering taking Tesla private, to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. However, we cannot predict the outcome or impact of any ongoing matters, and there exists the possibility that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC, the DOJ, or any other government agency were to pursue legal action in the future. Moreover, we expect to incur costs in responding to related requests for information and subpoenas, and if instituted, in defending against any governmental proceedings.”

In particular, the SEC has issued subpoenas to Tesla in connection with (a) Mr. Musk’s prior statement that he was considering taking Tesla private and (b) certain projections that we made for Model 3 production rates during 2017 and other public statements relating to Model 3 production. The DOJ has also asked us to voluntarily provide it with information about each of these matters and is investigating. Aside from the settlement with the SEC relating to Mr. Musk’s statement that he was considering taking Tesla private, there have not been any developments in these matters that we deem to be material, and to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. As is our normal practice, we have been cooperating and will continue to cooperate with government authorities. We cannot predict the outcome or impact of any ongoing matters. Should the government decide to pursue an enforcement action, there exists the possibility of a material adverse impact on our business, results of operation, prospects, cash flows, and financial position.”


G. Shanghai Gigafactory


Tesla is currently in the process of constructing a gigafactory in Shanghai for some unspecified amount of Capex. Tesla has not filed with the SEC the paperwork or the terms related to the construction loans it received from a consortium of Chinese banks. Tesla paid $141.3 million to acquire the land for the Shanghai Gigafactory in Q4 2018. We believe Tesla is using the $610 million it wired into Singapore in February for its equity contribution to the construction of the plant as well as to provide collateral for the Chinese bank loans. At the Model Y unveiling, Musk suggested the factory would look like this upon completion later this year:



In reality, based on pictures taken on the site in the last few days, the Shanghai Gigafactory is still a swamp where construction has only recently begun. It’s very interesting that there is currently little to no other development near the Shanghai Gigafactory.


Source: https://twitter.com/realChaoZhou/status/1106798951401840642


Source: https://twitter.com/realChaoZhou/status/1104270406192513025


In the 10-K Tesla states that it expects to commence production at this facility by the end of 2019. Based on how little construction of the facility has been completed (let alone started) so far, it appears highly unlikely that production at this facility will begin before the second half of 2020.


In January 2019, we began construction of our Gigafactory Shanghai in China, where we intend to commence production of certain trims of Model 3 for the local market by the end of 2019.”


Gigafactory Shanghai

We are constructing Gigafactory Shanghai in order to significantly increase the affordability of Model 3 for customers in China by reducing transportation and manufacturing costs and eliminating certain tariffs on vehicles imported from the U.S. We broke ground in January 2019, and subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online, we expect to begin production of certain trims of Model 3 at Gigafactory Shanghai by the end of 2019. We expect much of the investment in Gigafactory Shanghai to be provided through local debt financing, supported by limited direct capital expenditures by us. Moreover, we are targeting the capital expenditures per unit of production capacity at this factory to be less than that of our Model 3 production at the Tesla Factory, from which we have drawn learnings that should allow us to simplify our manufacturing layout and processes at Gigafactory Shanghai.”


H. Tesla Technicals


Tesla’s stock is currently sitting at its 200 week moving average. Over the last 3 years, TSLA’s stock has found support whenever it has reached this level and quickly bounced back higher. (This recent “analysis” on CNBC shows how some traders are conditioned to buy TSLA’s stock at this technical support levelhttps://www.youtube.com/watch?time_continue=1&v=yylnaGouzus .) It’s almost as if some entity finds this technical level to be very important. Historically, Elon’s twitter account gets particularly active in discussion of various Tesla “pumps” when the stock approaches key technical levels. Over the past month, Elon’s various twitter “pumps” and product “news” are no longer causing the stock price to rise. This change in market sentiment around the “newsflow” of the company significantly increases the probability that the share price will break prior technical support. We believe a break of previous technical support level could trigger a waterfall of selling from algorithms and retail investors.


Source: https://twitter.com/Prof_John_Frink/status/1103314447601291264/photo/1


Retail shareholders have been aggressively buying TSLA’s stock as it has leaked lower this year. The number of Robinhood accounts which own TSLA shares has increased by over 50%.


Source: https://robintrack.net/symbol/TSLA




Meanwhile, institutions like Fidelity continue to sell their shares.


Source: https://twitter.com/Paul_M_Huettner/status/1103731116085780485


Retail shareholders propping up a share price while large institutions continue to sell and some of the most successful short sellers in the world (Chanos, Einhorn, Drunkenmiller, Pallotta, Soros, et cetera) have major positions is not a sustainable equilibrium.




Tesla currently trades at 15.5x sell side consensus 2019 EBITDA estimates of $3.5 billion and 34.3x our $1.6 billion estimate of 2019 EBITDA. Other Auto OEMs trade between 3x to 8x EBITDA. At 10x our estimate of 2019 EBITDA, TSLA shares would be worth ~$50/share. This obviously assumes TSLA remains a going concern. In a bankruptcy scenario we believe TSLA equity would likely be wiped out.




  1. Developments in the SEC case against Musk and Tesla and Musk’s eventual removal as an officer and director of the company

  2. Poor Q1 deliveries announcement in early April

  3. $180 million SolarCity term loan due in April. Will this maturity be extended again?

  4. Poor Q1 earnings announced in late April/early May. Recognition by the street and press that Tesla likely has a cash balance less than it's on balance sheet deposit number

  5. Either a dilutive rescue financing or chapter 11 bankruptcy filing before the company’s $566 million bond maturity in November

  6. Product recalls announced by the NTSB or NHTSA related to known product defects or the deceptively promoted “Auto pilot”

  7. The DOJ charges Musk and/or Tesla with Securities and Wire Fraud related to the 2017 high yield bond offering

  8. A debt downgrade by Moody’s triggering a panic among TSLA’s suppliers especially Panasonic



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


  1. Developments in the SEC case against Musk and Tesla and Musk’s eventual removal as an officer and director of the company

  2. Poor Q1 deliveries announcement in early April

  3. $180 million SolarCity term loan due in April. Will this maturity be extended again?

  4. Poor Q1 earnings announced in late April/early May. Recognition by the street and press that Tesla likely has a cash balance less than it's on balance sheet deposit number

  5. Either a dilutive rescue financing or chapter 11 bankruptcy filing before the company’s $566 million bond maturity in November

  6. Product recalls announced by the NTSB or NHTSA related to known product defects or the deceptively promoted “Auto pilot”

  7. The DOJ charges Musk and/or Tesla with Securities and Wire Fraud related to the 2017 high yield bond offering

  8. A debt downgrade by Moody’s triggering a panic among TSLA’s suppliers especially Panasonic


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