All sorts of stocks getting hammered today: Tesla, Bio-on, Align Technology
1) All sorts of stocks are getting hammered today (not even counting Spirit Airlines (SAVE), which I'll discuss in tomorrow's e-mail)...
Let's start with Tesla (TSLA). I'm still analyzing its earnings report and will share my thoughts on it in future e-mails, but in the meantime I wanted to highlight even bigger news (that the company of course tried to bury in its conference call): the departure of one of the key members of Tesla's founding team, Chief Technical Officer JB Straubel, who oversaw the technical and engineering design of the vehicles.
As I've highlighted previously, Tesla has lost more senior executives than any company I can recall since Enron, but this one stands out... I think this is a huge blow. While I'm bearish on the stock, I've always acknowledged that Tesla's cars are amazing, years ahead of its competitors (though they are rapidly closing the gap), and now the key guy behind that is leaving...
I spoke with two top engineers at Tesla five years ago, one who had left years earlier and one who's still there today, and they worshipped Straubel. One said:
He rarely speaks, but when he does, it's the truth. He doesn't embellish like Elon does.
The other said:
Elon and JB ran the show. Those two are the real deal. I would never in a million years bet against them. There's nothing they can't do. JB is absolutely brilliant and extremely level-headed, clear vision, broad and deep.
I left when I thought Tesla wasn't going to make it. I think management was blind to engineers at that time. Once Elon got the prototypes and someone chose them, it was a frenzy inside the company. There was lots of politics and too much megalomania too soon. Lots of fiefdoms inside the company. Middle managers were horrible. So a half dozen of us all quit. About three months later, they fired all of the managers above us who were causing the problems, flattened the organization, and made JB head of everything.
Although these comments are quite dated, it seems like Straubel was (and, I would bet my last dollar, still is) critical to: a) Tesla's remarkable engineering achievements, and b) holding together an incredibly chaotic organization.
What can we infer from his decision to leave at this critical time? Maybe nothing. I have no doubt that he's incredibly burned out and he's obviously made enough money to never have to work again.
The bulls will no doubt argue that his decision to depart now – when the company just reported the highest deliveries in its history, decent positive free cash flow, and a lot of cash on the balance sheet – shows his confidence that the company can thrive without him.
My view is the opposite: Tesla is by no means out of the woods. By all accounts, things remain totally chaotic within the company, and huge engineering challenges remain, like finishing the China factory, developing and producing the Model Y in scale, etc.
I think Straubel likely got tired after 16 years of Musk's endless chaos, embellishments, and flat-out lies and, seeing a sinking ship, jumped before it’s too late...
If Tesla does end up encountering financial distress that crushes the stock over the next couple of years (a 50% probability, I'd guess), we will no doubt look back on Straubel's departure as a major milestone on that path...
2) In yesterday's e-mail about Gabriel Grego's epic takedown of Bio-on (BIT: ON), I wrote that the stock was only down 10%... but that's because it was halted. When it reopened today, it was cut in half – and has been halted again. The next bid implies that the stock will be down 73%... on its way to zero, mark my words...
I asked Gabriel for a comment and he replied...
We are fighting a relatively easy campaign against a company that has been making a mockery of capital markets and investors. I believe we made an extremely strong case that Bio-on is nothing but a house of cards... whose luck is now exhausted. Our fight is not over yet, however, so please follow us on Twitter at @qcmfunds. Safe investing to all.
3) Another stock getting whacked today is Align Technology (ALGN). Kudos to Wharton student Allison Zhao, who nailed this one. This is what I wrote in my April 23 e-mail:
Yesterday, I had the pleasure of being one of the three judges of the stock-pitch competition that was part of the seventh annual Wharton Investment Management Alumni Reunion.
The winner we selected from the three excellent finalists was Allison Zhao. She made a strong case that Align Technology (ALGN), the manufacturer and distributor of Invisalign clear orthodontic aligners, has 50% downside. Here's her summary:
"Until recently, ALGN has enjoyed 80%+ market share in the clear aligner market due to patent protections. However, beginning in October 2017, several key patents (described by ALGN's CEO as the patents that "choked most companies from getting into the marketplace" by preventing them from scaling) expired, opening the door for a huge influx of new competition."
This looks like yet another incredible business that's rapidly being disrupted by technology (especially the advent of inexpensive, small, capable 3D printers) and upstart competitors.
And the company's valuation certainly doesn't reflect any possible risks, as the stock is currently trading at 11.4 times trailing revenues, 43.4 times earnings before interest, taxes, depreciation and amortization ("EBITDA"), and 59.1 times earnings.
You can read her two-page summary here and her full 14-slide presentation here.
Congratulations, Allison! Here's a picture of us:
Best regards,
Whitney