Since Tesla stock has been on a rapid rise since November, there hasn’t been nearly as much FUD running across my feeds, but without fail there are a few analysts that are certain it’s about to all fall apart.
In particular, it seems like news media keeps covering Gordon Johnson, and I’ve been seeing him pop back up a bunch recently, so let’s take a look at Gordon, and then let’s take a look at his take.
Who is Gordon Johnson?
I’m going to keep to my rule and not link to what I feel like is bad information, so I’ll have a few fewer links than usual in my text, so that I avoid giving Gordon and his media enablers any larger of a spotlight. If you need to find this yourself, here’s a Google link with his site as the top result. I’m putting it in only because I’m going to directly reference his site for a bit, as it’s baffling to me.
Gordon Johnson is a stock analyst who, according to his company GLJ Research’s web site has been covering “steel, iron ore, graphite, electrode, electric vehicle, and solar spaces since initiating coverage in 2008,” where he is listed as CEO / Founder. He is partnered with James A. Bardowski, whose bio on the website manages to be extremely vague. For whatever reason, both Gordon and James have photos of themselves that are surprisingly low-rez. That doesn’t necessarily mean anything, but it stands out to me on their site.
Their site also features nine different times that Gordon’s opinions were featured in the news, with three of those opinions being specifically about Tesla. If nothing else, I feel like it’s an interestingly bold way to advertise your stock recommendations, when you’re very publicly featuring your bad calls.
For instance, one of those videos is from February 20th, 2019, when Gordon laid out his bear case that Tesla shares would fall to $72 on a day the stock closed at $302.56. If you’ve been following the stock, during this time it has more than tripled.
If I was attempting to sell my analysis, I would put front and center some calls that made me look really good, not one where I was so dramatically off.
Analysts are people, and people make mistakes. To generate revenue, they need to demonstrate that they hold positions that are valuable to an average person. If you get six major stock tips right out of ten, you’ll actually look pretty good. But, why you would highlight tips that you gave that were so massively off multiple times on your own site? I honestly don’t get this.
Maybe there is a clue in the “About” section, though, which states that “GLJ Research, LLC thus far has established a reputation for unique short ideas.” Is the goal to highlight his past Tesla short positions specifically to demonstrate that they have been against the grain for a long time? That when they make a call, they really believe it? I honestly don’t understand this.
Earlier in the same section, it states that their goal is “providing insight into relatively unresearched stocks to help investors find alpha.” Quite frankly, I am again baffled — if the goal was to provide insight into unresearched stocks, Tesla is not exactly the stock I’d be highlighting. It seems like there are 3,458,392 analysts for Tesla already.
I don’t know much about his other calls, but TipRanks puts his success rate at 55% with an average return of 0.1%. He’s ranked at 3,843 out of 6,718 analysts that TipRanks reviews, and his best rating was to buy Amtech Systems on February 10th … of 2010.
Truth be told, I don’t know that much about TipRanks, so it might not be that valuable as a research tool. I like to look at arguments regardless of the analyst to see what their research may have turned up that mine hasn’t. I decided to go through Gordon’s background in this piece in part because his “analysis” comes up so often. In fact, I wrote about his viewpoint before regarding warranty claims in January (his rating on TipRanks is up since then!), and he’s had a whole series of similar statements since that time that I’ve ignored.
So, what got me to write again now?
Gordon was recently featured on CNBC, and while the host didn’t make any ridiculous comments like Yahoo Finance did in the article I just linked to, Gordon got to present his entire bear case. In fact, the host introduces him by asking if he has been recommending the short the entire time, and Gordon for his part owns that he has. I’m going to cover what his argument was, and then I’m going to go back through it with my own commentary.
In this piece, Gordon starts by saying that the key in Tesla is revenue, not production or shipments. He states that Tesla’s revenue peaked in the fourth quarter of 2018, and that you aren’t going to see revenues at those levels for the past six quarters, which destroys the narrative that Tesla is a hyper growth company.
Then, Gordon discusses market share, looking at Netherlands, Norway and Spain (since they publish daily registrations) and noting that Tesla’s EV market share has fallen from 35% in Q4 2019 to 3% so far in Q2 of 2020. He then states demand is collapsing even without certain new entries that will be coming later this year.
Next, Gordon brings up that Tesla’s Q1 profit included $354 million in regulatory credits he expects won’t be able to repeat next year and that he and his team feel that Tesla’s warranty reporting is off (even stating he sent some of the receipts showing items they felt were miscategorized as “goodwill”). He argues that gives them further money that he feels they shouldn’t recognize.
Gordon sums up his argument that, every year, Tesla has lost money when looking at GAAP net income, and that while they have been wrong on the stock so far, they expect the narrative will fall apart later this year.
Let’s Break It Down!
The Key to Tesla is Revenue. First, I disagree with this statement. Tesla’s mission is accelerating the transition to sustainable energy. Tesla has made it pretty clear that it starts its production of new vehicle models with larger batteries and more expensive trims and then moves to smaller batteries as the company smooths out production. This serves to make the vehicles more affordable with time, increasing market share.
On top of that, this statement is flat out false. In Q4 of 2018, Tesla had revenues of $7.226 billion. In Q4 of 2019, Tesla had revenues of $7.384 billion. You can see it in Tesla’s financial statements. Last I checked, $7.384 billion is larger than $7.226 billion, so if we’re looking at what Gordon himself states is the key to Tesla, it seems to be doing better than he thinks.
Gordon had to apologize in July of 2018 after publishing a note headlined “TSLA may have Admitted to Actionably False Statements” when it turned out the statements he was quoting were from a lawsuit filed against Tesla, not from Tesla itself. Honestly, I don’t understand how you could let this sort of thing out. I tend to double check my research five or six times before letting it out, and I’d hope Zach would make me retract my statement if I made such egregiously wrong claims. Gordon is no longer working for Vertical Research Group, however, so I don’t know if anyone is holding him accountable for these misstatements now.
Market Share. Tesla’s European market share looks bad until we dig into it. Tesla’s Fremont factory was shut down for all of April, the time in which Tesla would have piled all of its vehicles onto ships to send to Europe for end-of-quarter delivery. Due to the pandemic, this did not happen.
Additionally, Europe has seen a huge increase in electric vehicle sales, at least in part due to new regulations that will fine automakers for emitting too much carbon per kilometer. This has resulted in Tesla partnering with Fiat Chrysler Automobiles for emission rules in Europe, a point we’ll come back to, as well as European automakers pushing their sales further. It’s why we’re starting to see market penetration of 10% in Switzerland, a fact that Zach just pointed out with an article over the weekend, and, as reported last night here, 7.8% market share in Europe. It doesn’t help Gordon’s argument, by the way, that the Model 3 in Switzerland held 16% of the market share.
Speaking of Gordon’s argument, the media outlet displays a chart beside him during his segment that sort of also defeats his argument. He argues that Tesla’s 35% market share from a year ago was the norm, yet you can see that the market share is constantly having peaks and valleys, with the highs being in the range of 30–50% market share — unsurprisingly, at the end of the quarter — and the lows dipping to around 10% market share in the first months of the quarter. Tesla was at 9% market share in Europe after 5 months.
We know that pandemic production woes would have greatly impacted what could have been shipped. We haven’t seen the end of this quarter, so removing 1/6th of the data creates an even more distorted view. That isn’t to say that sales aren’t down — they are — but the further you drill down into data, the less precise it becomes. For instance, Norway’s and Spain’s largest batches of Tesla registrations were in Q1 of 2019, while the Netherlands was in Q4 of 2019.
If you want to cherry pick information like Gordon, head to eu-evs.com and play with the data yourself. It’s interesting, but is far too narrow for me to get much information out of it.
Regulatory Credits and Warranties. On regulatory credits, Gordon claims these won’t last. Is he right? Maybe — but Tesla’s regulatory credits fluctuate constantly. Q1 2020 was $354 million, as Gordon claims, which did definitely help eek out a profit, but Tesla was profitable the prior two quarters while only claiming $134 and $133 million of credits then. Additionally, as Johnna Crider reported here back in January, Tesla’s agreement with Fiat Chrysler could pay them $2 billion over the next few years, or about an additional $150–200 million per quarter.
If we average Tesla’s regulatory credits for the past three quarters, they average $207 million per quarter. If we average the past four, it’s $183 million. In other words, the Fiat Chrysler agreement will make up almost the entire difference even if regulatory credits were fully dropped. In fact, I wonder if the giant increase in Q1 was the beginning of Fiat Chrysler’s payments to Tesla — I’m not sure exactly how Tesla would recognize this revenue.
How about warranty claims? I wrote a whole article digging into this, so I’ll just state the conclusion I had from that article here:
My […] conclusion is that Tesla’s warranty accounting is done to industry standards, and appears to be higher than necessary. It’s worth also pointing out that since Tesla was founded, it has had the lowest warranty claims rate of any manufacturer in 9 out of 10 years, with the outlier being 2010, when its only vehicle was the original Roadster.
Tesla Loses Money Every Year Based on GAAP Net Income. First, if you were wondering, GAAP stands for “Generally Accepted Accounting Principles,” and Gordon’s statement here is correct, although misleading. If you look at the entire year, Tesla has lost money every year so far.
During this time, I feel that it should also be pointed out, Tesla has started production of four different electric vehicles, prototyped another three intended to come to market in the near future, upgraded a factory that now has a capacity to produce 490,000 vehicles per year, created another factory in China capable of producing 150,000 vehicles per year, integrated a solar company, developed and deployed grid-scale battery backup, created a Supercharger network of 1,870 Stations with 16,585 Fast Chargers, and done some mystery stuff with batteries that we’ll learn about soon. And a bunch of other stuff I’m forgetting.
During this time, it’s true — Tesla has lost $6.675 billion of GAAP Net Income. So, the company has built quite a bit of infrastructure for its money. By comparison, VW expects to spend €7 billion to develop its own software. If you were wondering, using today’s conversion rates, that would work out to VW spending $7.87 billion to try to catch Tesla in just its software expertise.
For the last three quarters, Tesla has done all of the above while making money. It’s insane to expect a company in a capital-intensive industry like Tesla could expect to turn a profit immediately. I believe the return it has received on the amount of money it has spent so far has been nothing short of incredible.
Gordon’s statements are so far off and so cherry picked that it makes me wonder if there is another strategy at work. Gordon gets a lot of press coverage due to his overly bearish position. In fact, this was the fourth major bearish note I’ve seen from Gordon on Tesla in the past four weeks. (Note that my other “favorite” issue in his commentary came on June 23 when he stated that the deposit for the Cybertruck is $50 — easily proven false — and the Tesla Semi deposit was $100,000 — again, easily proven false.)
Let’s be honest — Tesla has some major detractors out there. Whether it’s ICE vehicle owners purposely blocking SuperChargers or those worried the Cybertruck turned their manly man-trucks into princess wagons, there is a market to hear the down side of Tesla. Their arguments appear to become less and less solid the deeper you dive into them, but a lot of people are just looking for confirmation bias, so Gordon’s analysis gets attention. Add to that the fact Tesla articles and segments get a lot of attention (in the past week, 8 of our top 20 articles involved Tesla!), and Gordon’s position as a top bear makes him very attractive for media organizations to bring him and his opinions in to “balance” the positive news they are hearing.
Perhaps Gordon’s strategy is to gain a lot of media attention by making bold statements about Tesla, and getting people who are already predisposed to dislike Tesla into looking at his other “unique short ideas,” which may be better researched. If those other calls turn out to be correct, he can show that he was wrong about Tesla, but he’s right more often than he’s wrong with his other calls.
It’s a risky strategy, but the top analysts on TipRanks only show a success rate of 82%, so maybe that’s the goal.
Otherwise, I just don’t get what’s going on here.
I can understand some people drawing negative conclusions using various Tesla metrics, but Gordon’s coverage is so off base just with the stuff that can be easily proven wrong that it makes me really question why he’s put on the air at all.
But hey, I just spilled nearly 2,500 digital words discussing him, and maybe that’s his entire goal!
I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.