Tesla's first-quarter earnings report; Julia La Roche interview with Bethany McLean; The End of Faking It in Silicon Valley; Short seller Nate Koppikar; We Flew Cheap Airlines to and From Europe to See If You Should, Too
1) Tesla reported first-quarter earnings and hosted its first-quarter conference call after the close yesterday. Here's the summary from Outset Global Trading:
Tesla (TSLA) Q1 EPS $0.85 vs. est. $0.84; Q1 revs $23.3B vs. est. $23.5B; net income and earnings drop more than 20% from last year; to remain ahead of long-term 50% CAGR on production with around 1.8 million cars for the year; still sees FY production 1.80M vehicles, vs. est. 1.84M; Cybertruck on track to begin production later this year; Bitcoin holdings unchanged in Q1 2023; Q1 GAAP Gross margin 19.3% v 29.1% y/y and operating margin 11.4% v 19.2% y/y.
Investors didn't like what they saw, and TSLA shares were down 8% this morning.
To understand why, here's a friend's bearish take:
Why Tesla is down after reporting Q1 results
Price cuts based on demand being weaker than production.
Tesla traded down 4% after reporting first-quarter earnings yesterday after the close another 2% after the conference call, mainly because investors are realizing that things are not going to improve for at least the next quarter or two – and quite possibly worsen.
Let's backtrack for a moment to see the setup to the quarter...
Tesla traded down dramatically last November and December, falling by half to a low of around $110 at the end of December. At the time, this had more to do with Twitter than Tesla, even though Tesla's fundamentals had started to deteriorate too, but only in China – not so much in North America or in Europe.
Then, Tesla started cutting prices in all geographies in early January – close to 10% to 15% on a weighted basis. All other things equal, that ought to have tanked the stock dramatically, taking it to new lows well below $100.
Yet, the opposite happened. The stock nearly doubled in January and into February for no sane reason whatsoever. It is really hard to explain why this happened, when the new data so obviously suggested that Tesla was having a severe demand problem and had to sacrifice profits in order to keep sales up with production.
Mind you, automotive production is not something that can be cheaply adjusted up or down on short notice. The supply chain is complex and requires many months of painful adjustment to do so. In this case, Tesla can't just reduce production on a whim when it faces demand that falls short of its previous planning.
As a result, Tesla did what other car companies always had to do in situations like this (think General Motors in 2008, for example): cut prices again and again. The latest price cuts happened just this week.
Let's forget the specific numbers Tesla just reported for a moment – margins, cash flow, etc. Yes, most of them were weak relative to expectations. What really sank the stock, however, was that there seemed to be no relief on the way. A usually upbeat management had no credible plan for why investors would be rewarded with a shift in trend lines in the near term. Basically, any continued softening of demand may force them to cut prices again... and again...
Investors are now starting to realize that more price cuts are likely because there is no other way to address the problem of softening demand. Sales, earnings, margins, cash flow – almost all metrics will continue to deteriorate in Q2, Q3, and possibly beyond. Earnings estimates will likely fall, and not just for 2023 but also for 2024.
This is Wall Street 101: if growth rates are reduced, and some key metrics are no longer even growing at all, but rather outright falling from the previous year, the multiples assigned to the company will normally also fall. This will be particularly acute for the market's most mo-mo previously-hypergrowth company (think AOL after January 2000).
If Tesla won't earn more than $2.50 or so per share this year, and things don't look much better for 2024, then if it were a regular automaker, the stock might be assigned a multiple of 5x to 10x at most, meaning it would trade in the $12 to $25 range. Yet, the stock closed on Wednesday at $180.59 (it dropped below $170 after the conference call).
Investors looking for excuses to sell are finding other reasons too...
Tesla's main problem is that, no matter the geography, competition is growing stronger every day with more new all-electric cars than I can keep track of.
Just this week, the Volkswagen ID.7 debuted, and it is the closest thing to a Tesla Model S yet to hit the market – a large hatchback:
Range should be somewhere over 300 miles, but the price may be closer to the smaller Tesla Model 3 sedan than the larger Model S hatchback.
In any case, there are so many new all-electric cars hitting the market that it's impossible to remember them all, especially when you include China. Still, for those of you spending all of your time inside the 50 states, you have not yet seen the Volkswagen ID. BUZZ – the all-electric minivan:
The consumer now has most exciting all-electric choices in all shapes and sizes, and this all helps to explain the headwinds that are causing Tesla to have to cut prices incessantly in order to move the metal.
I am short Tesla and while I think the potential is for a 95% decline in the stock, I imagine that in the near term – one or two quarters – it could realistically fall by 50% from here.
I'll be sending out more commentary about Tesla's earnings, including my analyst's bullish take, to my Tesla e-mail list in the next day or two. If you'd like to be added to it, simply send a blank e-mail to: tsla-subscribe@mailer.kasecapital.com.
2) I enjoyed this interview by one old friend, Julia La Roche, of another old friend, Bethany McLean – which you can listen to on Apple Podcasts here and Spotify here. Here's a summary:
Bethany McLean (@bethanymac12), author and journalist, joins Julia La Roche on episode 66 to revisit some notorious corporate failures and discuss fraud. Bethany is the author of The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron and All the Devils Are Here: The Hidden History of the Financial Crisis. She has also written two mini books, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants and Saudi America: The Truth About Fracking and How It's Changing the World.
She also serves on the board of the Stigler Center at the University of Chicago. She's a 1992 graduate of Williams College.
0:00 Background and path to journalism
1:47 Goldman Sachs to fact-checking at Fortune
4:15 Writing about investing
5:45 Another side to stories
6:37 Enron
9:20 Reporting the Enron story
14:45 Lessons from Enron
15:20 Do you own homework
18:00 Emotion in business
20:00 Short-selling
23:11 Do your own homework
24:19 Valeant stock battle
26:10 Legal fraud
30:38 A thin line between a fraudster and a visionary
33:15 World of business is crazier than ever before
37:45 Golden age of fraud?
41:03 Venture capital and private equity's reliance on low-interest rates
43:43 A different environment
44:44 Curiosity covering corporate failures
47:00 Can greed be eliminated?
48:48 Banking crisis
49:55 State of journalism
3) The world needs a lot more investigate journalists like Bethany (and my colleague Herb Greenberg) – not to mention activist short sellers – to uncover the massive amount of fraud out there... It's good to see that at least a little bit of it is being exposed and punished: The End of Faking It in Silicon Valley. Excerpt:
Faking it is over. That's the feeling in Silicon Valley, along with some schadenfreude and a pinch of paranoia.
Not only has funding dried up for cash-burning start-ups over the last year, but now, fraud is also in the air, as investors scrutinize start-up claims more closely and a tech downturn reveals who has been taking the industry's "fake it till you make it" ethos too far.
Take what happened in the past two weeks: Charlie Javice, the founder of the financial aid start-up Frank, was arrested, accused of falsifying customer data. A jury found Rishi Shah, a co-founder of the advertising software start-up Outcome Health, guilty of defrauding customers and investors. And a judge ordered Elizabeth Holmes, the founder who defrauded investors at her blood testing start-up Theranos, to begin an 11-year prison sentence on April 27.
Those developments follow the February arrests of Carlos Watson, the founder of Ozy Media, and Christopher Kirchner, the founder of software company Slync, both accused of defrauding investors. Still to come is the fraud trial of Manish Lachwani, a co-founder of the software start-up HeadSpin, set to begin in May, and that of Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX, who faces 13 fraud charges later this year.
Taken together, the chorus of charges, convictions and sentences have created a feeling that the start-up world's fast and loose fakery actually has consequences. Despite this generation's many high-profile scandals (Uber, WeWork) and downfalls (Juicero), few start-up founders, aside from Ms. Holmes, ever faced criminal charges for pushing the boundaries of business puffery as they disrupted us into the future.
4) And speaking of activist short sellers, Institutional Investor's Michelle Celarier has a nice profile of one of the few I don't know: Short-Seller Nate Koppikar Has Taken on Blackstone, Facebook, and the Tiger Cubs. He's Had an Amazing Year. Excerpt:
A veteran of the private equity world himself, Koppikar thinks more bad news is ahead for the asset class. He's shorting private equity's publicly traded asset managers, which he thinks will be among the biggest losers in what he foresees as a coming recession – one that will be different from 2008 because private equity credit funds, not the banks, are now holding the riskiest credits.
This year's stock market rally has meant a tough start for short sellers like Orso, whose performance is typically quite volatile. But in 2022, Koppikar's timing as Orso's portfolio manager was spot on. "Nate's genius is a God-given talent," says partner Matagrano, who handles research at the fund. "He knows in which ponds we should be fishing and which ponds we should be avoiding because he has a very acute macro sense."
Shorting big tech in 2022 might appear easy in hindsight. But at the beginning of last year, Koppikar worked hard to convince Matagrano and Orso's COO and CFO, Bob Morelli, that they should do what was at the time unthinkable in financial circles: short Facebook.
5) Activist short sellers published two reports yesterday: Blue Orca Capital on Shift4 Payments (FOUR) (report here):
Shift4 Payments, Inc. ("Shift4" or "the Company") pitches itself as a fast-growing, profitable fintech company at the forefront of new technology in payment processing.
We think this is a façade. We see Shift4 as, in reality, a roll-up of low-tech POS systems and payment processors which is substantially less profitable, generates far less cash, and is materially more levered than investors are led to believe.
As Shift4's stock tumbled through 2022, we believe that its CEO faced the threat of a margin call from an unusually large series of stock pledges, creating an existential threat that he would be forced to liquidate up to 10 million shares (12% of diluted shares outstanding).
With the specter of a margin call hanging over the stock, we think that Shift4 engaged in a string of highly questionable and hyper-aggressive accounting maneuvers seemingly designed to keep the stock afloat, from cash flow manipulation to inexplicable distributor acquisitions that enabled it to capitalize a major component of COGS. At the height of its financial gimmickry, Shift4 more than doubled its Q4 2022 operating cash flow simply by recalling a collateral deposit just before fiscal year end, recognizing the inflows as cash from operations, only to re-deposit funds as collateral with the same counterparty right after the quarter ended.
And Jehoshaphat Research posted its short thesis on Universal Display (OLED) on SumZero here (membership required). Summary:
In this report, "JR" explains his analysis of OLED's accounting and how he concluded that the company has been playing aggressive accounting games using long-term contract accounting. JR dissects the company's unbilled receivables, deferred revenues, contract assets, inventories, and other financial items in an analysis that lands on one big problem: When you strip out the accounting nonsense, OLED isn't growing, it's shrinking, and its ability to keep this magic show going has run out. 2023 revenue estimates are set up for a double-digit miss.
Readers will also find a fun story of social media intrigue when JR explains why he believes that OLED's longtime CFO has been the stock's best promoter on Seeking Alpha, under a secretive (but not so creative!) pseudonym.
SumZero users can visit jehoshaphatresearch.com to sign up for future JR reports as well.
6) A Wall Street Journal reporter took three trans-Atlantic flights in four days last week on three new ultra-low-cost carriers ("ULCCs"), Play, Norse Atlantic Airways, and French Bee, and overall had positive experiences, as she describes in this article: We Flew Cheap Airlines to and From Europe to See If You Should, Too. Excerpt:
I flew to Paris last week from an out-of-the-way New York airport on an airline you probably haven't heard of with Spirit-like fees, no seat-back screens, and a predawn connection in Iceland.
And I'd do it again to save money.
Flying to Europe affordably this summer requires more strategy than ever. Prices can easily top $1,000 given pent-up demand for international travel. Delta Air Lines said it has already sold 75% of its seats on international flights this summer.
Travelers without piles of miles or unlimited funds are searching furiously for a deal to Europe. Often topping those search results: Play, Norse Atlantic Airways, and French Bee.
These small, budget carriers have been adding flights between the U.S. and Europe, dangling introductory fares as low as $169 one way from New York to London and about $300 from Los Angeles or Miami to Paris. (Don't expect those prices for summer flights at this late date.)
I've never flown on any of these three, but I've taken dozens of flights on ULCCs in the U.S. – Spirit Airlines (SAVE), Allegiant Travel (ALGT), and Frontier – and Europe – Ryanair, EasyJet, Wizz Air, Vueling, and Norwegian, the predecessor to Norse Atlantic.
I've generally had positive experiences as well, but you need to have the right expectations (don't expect Wi-Fi, seatback screens, electric outlets, food, drinks, legroom, or reclining seats) and you need to know what you're doing (pack light!).
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.