Tesla bull-bear debate; ExxonMobil dropped from the Dow after nearly a century; Wirecard: the frantic final months of a fraudulent operation; Sorry, Seinfeld: Your love of NYC won't change the facts about its crisis

By Whitney Tilson

Wednesday, August 26, 2020
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1) I’ve never seen a bull-bear debate like the one over electric-car maker Tesla (TSLA).

The bulls have been triumphant so far, as TSLA shares are now trading for more than $2,000… and the company’s market cap is approaching $400 billion. Will this continue?

For the bull case, watch this long (43-minute) conversation between Tesla Daily’s Rob Maurer and Mad Money’s Jim Cramer (hint: listen at 2x speed): Jim Cramer & Rob Maurer Discuss TSLA Stock, Elon Musk, Tesla’s Battery Day, and Tesla’s Advantages

For the bear case, here’s the latest from my friend Doug Kass of Seabreeze Partners, who thinks “the stock may represent the largest single bubble – as measured by market capitalization of nearly $400 billion – in history”…

Trade of the Week (and Investment Short) – Short Tesla ($2014)

* I have assiduously avoided shorting Tesla for years.

* No more…

Telsa’s shares have climbed from [roughly] $350/share on March 19, 2020 to over $2,000 today.

It can now be argued that Tesla’s shares represent not only a good short-term short but, at current prices, the stock may represent the largest single bubble – as measured by market capitalization of nearly $400 billion – in history.

Here are the major points to my short investment thesis:

* Tesla has a shallow moat – the manufacturer has nothing that is proprietary in terms of electric car technology. Tesla’s competitors (in the U.S., Europe, and in China) have a century of experience consistently manufacturing and distributing high-quality automobiles which subsidized ongoing operating losses from their electric car endeavors.

* Polestar, Audi, Volkswagen (VLKAF), and others have highly rated electric vehicle (“EV”) offerings that are now or will be shortly offered.

* Adjusted for the sale of emission credits, Tesla has never been profitable in its 17 years of existence (despite having no competition and no need for advertising). In July, Tesla reported second quarter net income of $104 million, which included $428 million of pure profit emission credit sales, a revenue stream that will be drastically reduced later this year and which Tesla openly admits will disappear completely some time in 2021 (when other manufacturers have enough EVs of their own). Excluding that, Tesla lost $324 million and that’s before the accounting of a questionably low warranty reserve. The worrisome and accounting, recently pointed out by @WallStCynic, “depreciation and amortization was down (!) year over year despite a new factory coming on line. SG&A and research and development was also down year over year.” While sales are shrinking, the accounts receivable line is growing (remember this is a company that demands pre-payment before delivery.

* Tesla, at best, undertakes aggressive accounting. There are multiple lawsuits regarding the purchase of Solar City (which arguably bailed out the finances of Elon Musk and his family).

* Management turmoil at Tesla has intensified over the last one to two years.

* Tesla’s quarterly sales have actually dropped since the end of 2018. The only reason Tesla’s sales are being maintained is because of massive price cutting – and this is BEFORE the onslaught of competition that is on Tesla’s door step.

* Tesla’s second quarter revenues were buoyed by price cuts and sales into China (where EV competition is just beginning to start) while the rest of world sales were -30%. (For perspective General Motors (GM) sold over 710k units in China compared to only 30k for Tesla). Current sales are so weak that Tesla is aggressively advertising a price drop for the Model Y. The company’s market share in the competitive European EV market has fallen from about 30% to single digits.

* The market is not static. Analysts and market participants fail to consider how much of Tesla’s share of the EV market will be taken by the new models introduced by nearly every auto manufacturer, who’s announced spending plans will dwarf Tesla’s anticipated outlays. From Mark Spiegel: “Noted competition will include the Audi Q4 e-tron and Q4 e-tron Sportback, BMW iX3 (in Europe & China), Mercedes EQB, Volvo XC40, Volkswagen ID.4 and Nissan Ariya, while less expensive and available now are the excellent all-electric Hyundai Kona and Kia Niro, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7500 U.S. tax credit. Meanwhile, the Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful new Polestar 2 and the premium version of Volkswagen’s ID.3, and next year from the BMW i4.”

* The mere presence of all the competition will clearly lead to margin compression. As previously mentioned, Tesla is already cutting prices of its existing models.

* Bullish analysts base their future stock price evaluations on unsupported assumptions of what share Tesla will take of the global automobile market. They further assume that the margins that existed over the last two years – a period in which Tesla has faced little or no competition, will be maintained in the future.

* Tesla faces numerous lawsuits, including a May lawsuit accusing the company of selling units that were a fire hazard and a potentially significant and well publicized sudden acceleration class lawsuit delivered in July. Range claim issues have also recently arisen.

* Tesla no longer has a stock split as a catalyst as the company already announced a 5-1 stock split for shareholders of record on August 21.

Bottom Line

I have assiduously avoided shorting Tesla over the years, in part because of the high short interest, which has subsequently contracted to more “reasonable” levels.

I have followed Tesla for over a decade and I could add materially to the bearish case that I have summarized this morning.

That position has now changed.

Faced with an onslaught of competition, Tesla’s market cap is now nearly 4x that of Ford (F), General Motors and Fiat Chrysler (FCAU) combined – despite selling only about 400k cars/year, compared to the “big three’s” sales of 17 million units.

I am adding Tesla to my Best Ideas List (short).

My view on the stock hasn’t changed since I last wrote about it in my July 23 e-mail:

I’m not pounding the table that Tesla’s stock is a great short here. On the fundamentals, the company has a big lead in multiple enormous emerging markets, making this a very open-ended situation. Plus, to their credit, CEO Elon Musk and his engineers have consistently achieved things I wouldn’t have thought possible. And, as for the stock, the cult around it is unlike anything I’ve ever seen.

(If you wish to join my Tesla e-mail list, simply send a blank e-mail to: [email protected].)

2) I wasn’t the least bit surprised to see this news about energy giant ExxonMobil (XOM): Exxon Mobil dropped from the Dow after nearly a century.

In my February 3 e-mail, I analyzed the company’s financials… and what I found wasn’t pretty.

The company is suffering from declining revenue, net income, and operating cash flow… and this is combined with rising capital expenditures. The result is insufficient free cash flow to cover the hefty dividend payments, which are instead funded with rapidly rising debt and asset sales. Worst of all, ExxonMobil tries to obfuscate this reality with highly misleading disclosures to investors. I concluded:

ExxonMobil looks like a classic value trap – a melting ice cube that doesn’t come within a country mile of covering its dividend, which it will likely eventually be forced to cut (though not for a few years I suspect)…

For more on the decline of this once-great company, I recommend this in-depth Bloomberg story, The Humbling of Exxon. Excerpt:

Perhaps no company has been humbled as profoundly by recent events as Exxon, the West’s largest oil producer by market value and an industry paragon that sets the bar not just for itself but for its competitors. And the pandemic isn’t primarily to blame; the culprit is just as much the company itself.

The coronavirus has laid bare a decade’s worth of miscalculations. Exxon missed the wild and lucrative early days of shale oil. An adventure in the oil sands of Canada swallowed billions of dollars with little to show for it. Political tensions doomed a megadeal in Russia. Exxon ended up spending so much on projects that it has to borrow to cover dividend payments. Over a 10-year period, Exxon’s stock has declined 10.8% on a total return basis, which includes dividends. The company’s major rivals all posted positive returns in that period, except for BP (BP), which had the Deepwater Horizon spill in the Gulf of Mexico in 2010. The wider S&P 500 Index has returned nearly 200%.

The oil business is all about how much you produce, how low you get your costs, and how well you capture resources for the future. Exxon produces about 4 million barrels a day – essentially the same as 10 years ago, despite repeated vows to push the number higher. Meanwhile, the company’s debt has risen from effectively zero to $50 billion, and its profit last year was a bit more than half what it was a decade ago. Once the undisputed king of Wall Street, Exxon today is worth less than Home Depot (HD), which has less than half the revenue.

3) The story of German payments processor Wirecard (WDI.DE) keeps getting crazier…

Here’s the latest news from the Financial Times, the lone media organization that did good work over the years to expose the fraud (which I warned my readers about many times, starting on March 20, 2019): Wirecard: the frantic final months of a fraudulent operation. Excerpt:

The codename was “Project Panther”. Markus Braun, the chief executive of German payments group Wirecard, had hired McKinsey & Co to help prepare his most audacious idea yet, a plan to take over Deutsche Bank (DB).

In a 40-page presentation last November, the consultants insisted the new entity, to be dubbed “Wirebank”, would be “thinking and acting like a fintech, at the scale of a global bank”. By 2025, it could generate €6bn in additional profit, McKinsey claimed.

While Germany’s largest bank sat on €1.4tn in assets, it was worth a mere €14bn on the stock market, roughly the same as Wirecard. The McKinsey report promised that the combined stock market valuation would double to close to €50bn.

A deal to acquire Deutsche Bank would have been the crowning achievement for a company which within a few years had become one of the most valuable in the country, winning the label of “Germany’s PayPal”. An upstart financial technology company would be running Germany’s most illustrious bank.

A tie-up with Deutsche Bank had another potential attraction: a deal offered the prospect of a miraculous exit from the massive fraud Wirecard had been operating. Around €1.9bn in cash was missing from its accounts and large parts of its Asian operations were actually an elaborate sham. By blending Wirecard’s business into Deutsche’s vast balance sheet, it might be possible to somehow hide the missing cash and explain it away later in post-merger impairment charges.

There was one catch. To even start preparing such a deal in earnest, the company needed to get a clean bill of health from KPMG, which was conducting a special audit of Wirecard’s books.

The approval from KPMG never came.

Six months later the curtain fell on Wirecard. On June 25, the group collapsed into insolvency after it was exposed as one of Germany’s biggest postwar accounting frauds. Prosecutors in Munich suspect that €3.2bn in debt raised since 2015 has been “lost”. Around €1bn was handed out in unsecured loans to opaque business partners in Asia.

4) In a New York Post article, James Altucher replied to Jerry Seinfeld’s op-ed in the New York Times, calling him a “once-great comedian”: Sorry, Seinfeld: Your love of NYC won’t change the facts about its crisis. Excerpt:

Does this mean people like remote work? No. But most studies agree: Remote is more productive. Again, this isn’t my conjecture. Thousands of firms that make up New York’s tax base have concluded so.

The knock-on effects, combined with those from the needlessly protracted lockdown, are devastating.

Thousands of restaurants have shuttered their doors permanently. Yelp has said up to 50 ­percent of the restaurants it tracks are out of business. A study by Partnership for New York City found that up to one-third of Gotham’s 240,000 small businesses may never reopen.

What does this mean? It means more revenue declines and even higher deficits. It means the choking death of the tourism industry. It means eerily empty office buildings.

We are just beginning to see the beginning. The beginning! A city spokesperson said that up to 22,000 layoff notices will go out Aug. 31. These layoffs will hit emergency workers (who risked their lives at the height of the pandemic), garbage collectors, teachers and policemen. That last group’s loss will be ­especially tragic, given the 130 percent increase in shootings this year.

A city can’t survive blows like this.

Nobody wants this. I don’t want it. Seinfeld doesn’t want it, though he doesn’t exactly suffer.

It’s working-class people who will bear the brunt: the dry cleaners, the deli-sandwich virtuosos, the retail workers. Seinfeld and others imagine that “grit” and “resilience” are all it takes. Magical thinking is such a wonderful thing.

Best regards,

Whitney

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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