“Elon Musk has personified the hopes and dreams of this bull market; Tesla burnishes its results through aggressive accounting; it’s a culture of deception because it is selling self-driving, which doesn’t yet exist.” – Jim Chanos from “We Are In The Golden Age Of Fraud” (Financial Times)
Jim Chanos is perhaps the most well-known remaining short-seller in this market. Don’t be fooled by his demure characterization of Elon Musk and Tesla. It’s calculated diplomacy. The numbers are far more than just polished up to look good and the accounting is not just “aggressive,” it’s fraudulent, and Chanos knows that as well as anyone. Large, successful hedge funds that have lasted as long as Chanos’ Kynikos Capital Partners spend a considerable amount of money hiring private investigators and financial forensic sleuths before putting on and sticking with large short positions. I don’t know if Chanos hires P.I.’s but he knows all well as anyone that the accounting is fraudulent rather than just “aggressive.”
Tesla’s stock ran up to $1650 in the two days before reporting Q2 numbers. After that, it closed lower every day, including losing $175 on Thursday and Friday combined after the earnings report. Tesla is promoted as a “growth story.” But its revenues unequivocally do not exhibit any growth (graphic courtesy of @TESLAcharts):
Anyone see any growth in those numbers? Tesla’s Q2 revenues declined 5% vs Q2/19, despite the continued ramp up the Shanghai factory and the addition of the Model Y to the revenue stream. The virus crisis was not a factor in the lower revenues because unit deliveries increased 3% from Q1 2020. Tesla cut prices on all of its models in every market multiple times during Q2. Outside of China, Tesla’s deliveries declined in every market, especially the Models S/X, which are rapidly trending toward zero deliveries. YoY total Model S/X deliveries including China plummeted 40%.
Tesla played the typical games it plays in order make the gross margin appear larger and to squeeze out an operating profit. The Company managed to show a $327 million operating profit. But $428 million of that is attributable to TSLA’s sale of emissions credits to OEMs. Most of this is from a deal with Fiat/Chrysler. Recall that emissions credits are a regulatory mandate in every country. The large OEMs do not produce enough EVs and thus need to buy some of the excess credits generated by TSLA. But as OEMs ramp up their production of EVs, they’ll no longer need to purchase these credits. Even the CFO admitted on the earnings call that the revenue/profits from this source will eventually disappear. Without this revenue source TSLA’s operations would have lost money again. In other words, without the Government mandated emissions regulations, TSLA’s business model does not generate income.
Tesla also once again slashed R&D expenditures, which were $279 million in Q2 vs $324 million in Q2/19. In fact, TSLA’s R&D expenditures averaged $331 million over the previous four quarters. And yet, despite supposedly developing an EV truck, semi and roadster plus working to develop full automatic driving, TSLA spent 16% ($52 million) less on R&D in Q2. Every dollar reduction in R&D translates into $1 of operating income. Additionally, TSLA’s capex expenditures every quarter continue to be less than its depreciation expense. TSLA is cannibalizing its existing manufacturing assets. This is apparent from the rising complaints about the quality control, especially with regard to the Model 3 and the Model Y. To some extent, reduced capex reduces the cost of revenues and helps pad the gross margin.
And of course I would be remiss if I didn’t touch on the Accounts Receivable (A/R). I detailed the A/R scam in last week’s issue. Refer to that if you want an in-depth review. Once again TSLA’s A/R hit an all-time high, soaring 29.4% higher Q2/19 to $1.48 billion. This is despite the 5% drop in revenues. The A/R was 24.6% of revenues in Q2 vs 18% of revenues in Q2/19. Recall that GM’s A/R is just 10% of revenues and GM is a sprawling global auto OEM and defense contractor. Furthermore, in the auto business, customers are required to pay for a vehicle (either with cash or bank financing) before they can drive away with their vehicle. There is just no conceivable explanation that can justify this red flag and the one given by the CFO on the earnings call was an exercise in blowing smoke.
Chanos referred to the regulators, like the bank puppets at the SEC, as “finanical archeologists” who tell us what happened after a Ponzi company implodes. As an example, Harry Markopolos laid out an air-tight case about Bernard Madoff’s Ponzi scheme and put the report in the lap of the SEC. The SEC ignored him. Madoff blew up in late 2008 and was arrested shortly thereafter.
The reason this occurs is because the SEC exists as big bank puppets. JP Morgan made a fortune on Madoff’s “business.” Same applies to Tesla and Elon Musk. Goldman and Morgan Stanley will skim $100’s of millions in various fees between now and the time when Tesla blows up. But don’t complain you weren’t warned if you get burned holding the shares or stuck with a dysfunctional EV that will no longer be serviced.