Value investing icon-cum-embattled hedge fund manager David Einhorn - in the midst of his own struggles with a dreadful stretch of returns – is not ready to throw in the towel on his criticisms of Tesla.
Coming off of Tesla's Q3 report - which on the surface handily beat expectations - Einhorn proclaimed this quarter to be Tesla's high water mark, stating on his Greenlight Capital Re call on Tuesday morning that Model 3 demand is now going to drop off.
During the call, Einhorn said that "We believe this will be as good as it gets for the company. We believe they’ve exhausted most of the demand from customers who can afford the highest-priced versions of the Model 3. Tesla is contending with a litany of competitive, regulatory, human-resources, vehicle-quality and capital-structure issues."
Einhorn's prediction flies in the face of guidance that Tesla would be cash flow positive and profitable going forward. As a reminder, for Q3, Tesla reported what Bloomberg dubbed a "historic" quarter because not only did Q3 revenue and earnings soar, smashing expectations, but the company reported an unprecedented $881 million in Free Cash Flow, over $600 million more than the $280 million expected. Tesla also produced 5,300 Model 3s in the last week of Q3.
Almost immediately several analysts took exception with Tesla's results, including one who claimed the company used "every trick from every fraud to put lipstick on Q3 results". The release of Tesla's 10-Q over the last few days has helped some skeptics continue to find new reasons to voice concern about the company.
For example, the Wall Street Journal's Charley Grant recently drew attention to the company's statements about tax credits that it received during the quarter:
Tesla booked $189.5 million in credit revenue in the quarter, an unusually high result. Tesla had booked a total of about $135 million in the first two quarters of the year. These credits are almost pure profit for Tesla. Tesla’s earnings press release only mentioned $52 million in revenue from credits. The total amount was only revealed in Tesla’s 10Q regulatory filing on Friday, after a nearly 20% run in the stock.
He also pointed out a $56 million difference in net income that came from the company lowering its estimated warranty expenses per vehicle:
In the third quarter, Tesla set aside $187 million in estimated warranty expenses, or about $2,242 per vehicle delivered. In the second quarter, that expense was $2,910 per car. That quarter was the first period where the Model 3 was Tesla’s best selling product. Net income would have been about $56 million lower using the same figure as in the second quarter, according to analysts at UBS .
As a reminder, we wrote in early October that Einhorn had compared Tesla to Lehman Brothers:
In thinking through TSLA more, it brings us back to Lehman, which went bankrupt 10 years ago. One of our key insights into Lehman was that the company had faced a credit crunch in 1998, bluffed its way through and got away with it. In fact, rather than facing regulatory, legal or even market consequences for failing to own up to reality in 1998, the company was rewarded when its business turned. This emboldened management to be even more aggressive during the next credit crunch in 2007 and 2008.
Lehman threatened short sellers, refused to raise capital (it even bought back stock), and management publicly suggested it would go private. Months later, shareholders, creditors, employees and the global economy paid a big price when management’s reckless behavior led to bankruptcy. The whole thing might have been avoided had the authorities cracked down on Lehman in 1998.
There are many parallels to TSLA. In 2013, TSLA was on the brink of failure as customers who had paid deposits weren’t taking delivery of the Model S. TSLA’s cash reserves fell to a dangerously low level and CEO Elon Musk secretly and desperately tried to sell the company to Google. Rather than communicating the truth to shareholders, Mr. Musk bluffed his way through the crisis. There were no regulatory, legal or market consequences for failing to own up to reality. The business survived, and Mr. Musk was celebrated for his successful bluffing.
In our opinion, this has emboldened the TSLA CEO to embark on ever more aggressive deceptions.
He has yet to change his mind.