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Published on July 29th, 2018 | by Maarten Vinkhuyzen

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Does Hedgefund Honcho Steve Eisman Not Have A Research Department To Give Him The Facts On Tesla? — #Pravduh #RealityCheck

July 29th, 2018 by  


Money manager Steve Eisman has a sterling reputation. He is one of the few who saw the 2008 financial collapse coming and reacted accordingly, making a lot of money for his clients. To do this, you have to know the market thoroughly and have access to a lot of information, researching large amounts of data.

Now he has become interested in Tesla, but it looks like he did his research by interviews at the 19th hole. It is a place where you can get good tips from well informed people. It is also a place where fishing and hunting stories get scarier every time they are told. His Tesla knowledge is clearly based on the second type stories.

Steve Eisman vented his knowledge about Tesla in an Bloomberg interview and told them that he entered into a short position on Tesla. Such is his reputation that enough speculators thought this a serious warning and the Tesla stock price fell 1.5% on this news.

So, what does Eisman think he knows about Tesla?


He is worried about “bad execution” by Elon Musk. You can’t get more vague in your argument. Without examples, I have no way of knowing what has alarmed him. So let’s look at the highlights of the last 2–3 years.

Musk’s first big mistake was the launch of the Model 3 on 31 of March 2016. I actually wrote an article about it. The launch was way too early, more than 20 months before start of production — but there were sound marketing arguments to do it at that moment. When he announced the timeline and volumes he intended to produce, the complete industry got in a fit. Reaching a production rate of 500,000 cars (100,000 S&X and 400,000 Model 3) by the end of 2020 was completely impossible.

Musk failed to listen to his much more experienced peers.

The next disaster followed the days after the unveiling. The numbers of reservations kept climbing and passed 400,000. With the impossible timeline just announced, the prospective customers would have to wait up to 5 years for their cars. That was unacceptable for Musk. An accelerated timeline was devised, with start of production 6 month sooner and a goal of reaching 5,000/week 12 months sooner. Furthermore, he set a goal of reaching not 8,000 but 10,000 per week 18 months sooner. This was mind-bogglingly impossible in the minds or at least statements of many auto executives.

Disaster never comes alone. Shortly after the start of production of Model 3, Puerto Rico was hit by 2 storms and the federal government failed to treat Latinos in the colonies in a satisfactory way. The immigrant leading Tesla thought these people deserved a different treatment and relocated the tech teams from solving Model 3 production bottlenecks to solving storm-devastated Puerto Rico problems. Yes, for a CEO who is accountable to Wall Street, that is completely irresponsible.

In the end, the 5,000/week production rate was attained only 6 months sooner than in the impossible timeline. In other words, it is true that Tesla did not execute on its most ambitious timeline, one that was widely believed to be completely impossible, but what it has achieved is still something that many in the industry considered to be impossible*.

That is, on a high level, what I know about the execution at Tesla. In the same time, the safety on the factory floor went from just below average to just above average.


Another point he worries about is the high number of top executives leaving the company.

Tesla is a closely watched company and seen by many outsiders as the best place to work to save the world. Saving the world is great, but not always at more than 80 hours a week. Furthermore, headhunters are interested in top Tesla staff for constantly bubbling startups and openings at larger corporations. Every departure is news and I too hate to see good people go, but in the end, the average tenure at Tesla is about the same as at other Fortune 500 companies, and better than at the headquarters of most of Tesla’s Silicon Valley colleagues.


The next point is really not understood by many — autonomous driving.

The competition is trying to get autonomous taxis on the road. Extra hardware that costs more than a base Model 3 is no problem for an autonomous taxi if it can cut the costs of a driver. The sensor bay on the roof and the small datacenter in the trunk aren’t deal breakers for fleet managers buying these cars. The first geofenced tests with these vehicles have started by Waymo and one or two others.

Tesla is not developing this kind of application. The Tesla autonomous features have to work in a normal private car — with a set of sensors that do not materially increase the price of the car, and the compute hardware is just a beefed up central processing system for the car. And this is being developed not for small geofenced test areas, but for the whole world at once.

I don’t think there is a sensible way to compare the two types of systems. Neither is there anybody who really knows who is ahead of who on capabilities.

Editor’s note: For a couple of detailed, expert opinions espousing Tesla’s advantages in this field, see these i exclusives: “Tesla Has Strong Advantages In Race To Self-Driving Cars” and “Geohot: Tesla Autopilot = Apple iOS, Comma.ai = Android.”


The red flag for every money man: There is a large and continuing negative free cash flow.

When you have just reached production of 100,000 cars per year, you don’t have the revenue to build overnight production capacity of 500,000 or more cars per year while keeping your free cash flow positive. This should not be a point of discussion. Any serious investment analyst should have explained that this is a non-issue. And for those who have not the time or the tools to build their own model, we have made our model freely available.

To illustrate what is in it, here’s a screenshot of the free cash flow (FCF) for the last 5 quarters:

What is far more important than the FCF is the question whether the money is well spent. The yardstick for that measure is the depreciation of the Model 3 tools and equipment. At less than $2,000 by a 5,000/week production rate, it is below what is common for this type of car. The ROI will likely be high.


Last but not least, is the red herring in all of these discussions — big competition is coming.

First, we have to establish what competition is. Competing offerings from other carmakers are cars that can win sales from Tesla. In other words, we are not talking about the Smart Fortwo ED or the Nissan LEAF, neither the Chevy Bolt or the other offerings that are coming in the a-, b-, and c-segment, perhaps with the exception of the top-of-the-line Hyundai offerings.

Tesla is offering the Model S and Model X, both with an ASP above $100,000 and wait times of 2–5 months. Each of those models are produced at about 50,000/year. Beside those two, it offers the Model 3 between $35,000 and $80,000 with a wait time up to 6 months and produced at 500,000/year. Those are not the current numbers, but those are the numbers when the competition enters the market.

Car Starting Price Volume Waiting time
Jaguar I-PACE $80,000 15,000 – 25,000 1 year
Audi e-tron quatro $80,000 70,000 ½ year
Mercedes EQC $70,000 50,000 1 year
BMW iX3 $75,000 50,000 – 100,000 ???
Volvo (2021) $40,000 ?? ???

Except for the Volvo, these are all SUVs with a price somewhere between the Model 3 and Models S & X. When these products come to the market (and they will sell very well, no question about that), will they steal sales from Tesla. Or will their entry into the market validate the concept of luxury BEVs and grow the market with more demand than all of them together can fulfill. My guess is that they will grow the market just in time for the Model Y, which (if history is any guide) will be a better SUV than any of these at about half the price.

The reason that the Model Y will be a better car at a lower price point is that Tesla has a better technology, economies of scale, and a far less costly sales channel.

And even if the competition wants to meet demand, without batteries, all the competition will do is promote Tesla.

Let’s conclude, after the red herring, with another sailor’s wisdom: “A rising tide will lift all boats.”


Closing this review of the 19th hole research results, I am left with a question. Does his firm not have a research department that can give him the real facts?

This is another “knowledge by rumor, not knowing the facts” situation. This is why we made this spreadsheet of Tesla’s financial model.

Please, mister Steve Eisman, don’t be too proud to use it.

*Editor’s note: It might be worth noting that Musk (and we here at CleanTechnica) have commented before that the impossible timelines might help to achieve the practical goals sooner than they would have otherwise. There is debate on this topic, though. 
 





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About the Author

Grumpy old man. The best thing I did with my life was raising two kids. Only finished primary education, but when you don’t go to school, you have lots of time to read. I switched from accounting to software development and ended my career as system integrator and architect. My 2007 boss got two electric Lotus Elise cars to show policymakers the future direction of energy and transportation. And I have been looking to replace my diesel cars with electric vehicles ever since. And putting my money where my mouth is, I have bought Tesla shares. Intend to keep them until I can trade them for a Tesla car.



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