Flying cars as depicted in this cartoon series from the 60s.
Predicting the future is hard. Yet many people talk about self-driving cars as if they will become reality in a few years. Unfortunately, the current reality is that we are far away from commercialization of fully self-driving cars. Google is the closest, yet its self-driving car technology has some serious limitations:
- It requires an attentive human driver to drive safely. This largely defeats the point of a self-driving car.
- It doesn’t work if there is heavy snow or rain.
- The car only works in areas with special 3-D maps, which are currently expensive to create.
- The system can’t handle construction zones.
- Because they drive in a non-human manner, the cars get rear-ended more often than human drivers.
- There are other situations where the cars may have problems – left turns without a light and heavy traffic, potholes, pulling aside for emergency vehicles, obeying directions from a police officer, ice on the road surface, cyclists doing a track stand, etc. etc.
I find it interesting that so many people have been sucked into the idea that self-driving cars will be an imminent revolution that will disrupt our lives. Mostly, there are many people who want to believe that technology will disrupt our lives in a positive way. There is no differentiation between technologies with major technical obstacles (e.g. artificial intelligence, machine learning) and technologies with few obstacles (e.g. cloud computing, social media, smartphone apps, over-the-top video, etc.).
My original reasoning on both Tesla and Green Mountain Coffee Roasters is probably wrong so I will be looking to cover both. Both companies may morph into rapidly growing growth stocks and I don’t want to be short that type of stock.
Regarding Tesla’s earnings press release (SEC filing), here is what I see:
- “We also expect to be near breakeven on cash flow from operations.” This is music to my ears. Because Elon Musk is always overly optimistic, this means that Tesla will have slightly negative cash flow from operations. Add in capex and this means that Tesla will definitely be unprofitable. I am guessing that ramping up to 5000 cars a quarter instead of 4500 will still mean that Tesla is unprofitable.
- Tesla expects to reach full production in the next year. 20,000 cars next year with 4,500 in the next quarter. I’m not sure that their explanation for the shortfall (4500 versus 5000) makes a lot of sense: “[We] gave the manufacturing team the first week of the year off to celebrate their accomplishments during 2012“. I don’t know much about car manufacturing but they will idle expensive tooling equipment because the workers wanted to celebrate? And wouldn’t you want to celebrate before New Year’s before rather than after?
- “In the first quarter of 2013, we expect to generate slightly positive net income, on a non-GAAP basis.” Companies typically inflate non-GAAP earnings by adding in stock-based compensation. Shareholder dilution is still an expense, though Tesla’s management is smart in using stock-based compensation to raise money. I think that analysts are intelligent enough to smell BS in non-GAAP earnings… I believe that this is stuff that they deal with a lot. Institutional investors may exit the stock because of this. They might stick around if there is hope in the future (Model X???)… with mining companies overvaluation tends to last a lot longer because it legitimately takes several years to build most mines so it takes several years for investors to realize that they’ve been duped.
- The other way non-GAAP earnings can be inflated is by recognizing expenses that are “one-time”. Of course, I’m sure that analysts have figured out that companies recognize “one-time” expenses year after year after year. Basically… for Tesla to say that they will be non-GAAP profitable is a joke. If you polish a turd it’s still a turd.
- Sometimes non-GAAP earnings are helpful if there are arcane accounting rules that cause earnings to be weird (and these definitely exist). If this were the case, I’m sure that Tesla’s promotional management would explain the accounting intricacies for everybody. This does not seem to be the case.
In general, the press release was written to be misleading.
- “Achieved 20,000 annualized production rate”: Tesla is saying that they will deliver 4,500 cars in the next quarter versus 5,000.
- “First profit now expected Q1 2013 versus prior guidance of late 2013”: What profit? Tesla will be GAAP unprofitable in the next quarter.
*Disclosure: Short Tesla via the common stock and the puts. The puts are probably a better idea… I’ve been bought-in on the common before and it stinks.
KB Home (KBH): The stock ran up (around $19.57). Originally I said that they should sell stock… now they are doing exactly that. This is somewhat bad for the shorts (~34% of the float is short) as intrinsic value will move closer to the secondary offering price. I plan on waiting to see if the short thesis plays out.
The short Tesla trade is extremely crowded. 60%+ of the float is sold short and the borrow was over 90% at one point.
I believe the main reason to short Tesla is because it has historically lost a huge amount of money every year. For every dollar in revenue, it has had at least a dollar of GAAP losses. The valuation is also ridiculous. The market cap is roughly $3B for a company that has less than $300M in book value ($62M as of June 30 2012, which is before the latest secondary offering).