Part I is the main event. I'll describe three ways in which Tesla (NASDAQ:TSLA) materially misleads its investors with its reporting of "pre-orders" and "Customer deposits".
In Part II, I'll take a quick look at the raging NHTSA controversy, focusing on what Elon Musk says about Seeking Alpha commenter Ralph Vader.
In Part III, I boast a bit, this time about how I accurately predicted that the early Model 3 unveiling would "Osborne" Model S demand.
Part IV revisits a claim Tesla made in its May 4, 2016 Shareholder Letter, suggesting Model S demand was strong. I questioned the claim at the time as highly misleading, and it turns out I was right.
I. PHONY 'PRE-ORDERS' & MISLEADING 'CUSTOMER DEPOSITS'
Tesla's accounting is far from transparent, and is often misleading.
I can't possibly cover the waterfront in a single article so I'll focus first on one aspect that is especially egregious: how Tesla reports and accounts for "pre-orders" and "Customer deposits".
1. Misleading reporting about Model 3 deposits
Consider this Elon Musk tweet, from April 7:
This tweet is egregiously misleading at several levels.
Reservations are not "preorders".
The word "preorder" is patently deceptive. As the contract between Tesla and each deposit maker makes clear:
- The deposits are not orders or pre-orders;
- Tesla does not guarantee a price;
- Tesla does not guarantee a delivery date;
- Tesla does not guarantee a car;
- Tesla does not even guarantee a place in line; and
- Tesla can refund the deposit and cancel the reservation whenever it chooses.
History shows many reservations will be cancelled.
The implication of Musk's tweet is that all the Model 3 reservations will convert to orders. Musk knows that will never happen.
Consider the Model S reservations, which were $40,000 for Signature versions and $5,000 for production cars. Of the 22,272 sequentially numbered reservations taken between 2009 and 2012, only 8,902 were converted to orders.
That's a yield of 39%.
Now, consider the more recent Model X reservations; again, $40,000 for Signature versions and $5,000 for production cars.
The data to date (gathered by me, Bonaire, and temagami) show Tesla has achieved less than a 33% yield on the 32,748 original sequence Model X reservations (those made before October 2015).
The yield may well be less than 30%.
(Please don't leave comments telling me I don't know the precise Model X yield figure. Instead, consider directing your fire at Tesla, which knows the precise number but isn't telling.)
A Model 3 reservation has a far smaller deposit than did those for the Model S or Model X. The smaller amount, and hence smaller commitment, suggests that the Model 3 yield will be even lower than that for the Model S or Model X.
"$14B in preorders" compounds the falsity.
Musk's use of the $14 billion figure had the potential for confusing unsophisticated investors about whether Tesla actually had collected such revenues.
You don't believe there are any Tesla investors out there who are that unsophisticated? Let me invite you to take a random walk through the comments section of any Seeking Alpha article about Tesla.
And the commenters here, members as they are of a financial site, are presumably more sophisticated than the general run of retail Tesla investors.
Musk knew Tesla would soon conduct another equity offering.
I knew Tesla was going to launch a capital raise soon after the Model 3 unveiling. I very confidently predicted it only six weeks after Musk stated that Tesla would not do so.
And it's not as if I'm gifted with any extraordinary prescience. I'm not. Many Seeking Alpha contributors and commenters also saw that capital raise coming a mile away, and so did many other Tesla watchers.
So, whom did Elon Musk think he was fooling when he claimed to be surprised by the volume of Model 3 "preorders"? His Model 3 tweet-a-thon, with no fewer than 17 tweets from March 31 through April 7, was calculated to whip the frenzy further.
Does anyone seriously doubt that, well before the Model 3 unveiling, Tesla officers already were keenly aware they would need a capital raise in 2016, and had engaged in discussions with Goldman Sachs and Morgan Stanley about that need?
Does anyone seriously doubt that, by March 31, Musk and his tax advisors had explored the ways he could exercise his stock options that expired at the end of this year while at the same time satisfying his tax obligations?
Does anyone seriously doubt that by March 31, Musk and his tax advisors had determined that the preferred path was for Musk to tag along on a Tesla follow-on equity offering?
So, I submit, there's plenty of circumstantial evidence showing Musk's tweets were not simply misleading, but were misleading in pursuance of a premeditated effort to pump up the stock price.
A final note: when it comes to adhering to the U.S. securities laws, a tweet is no different from a statement in an Annual Report.
2. Convenient Omission of Model X Deposit Numbers
Tesla boasted of almost 20,000 Model X deposits in its 2014 Annual Report (filed in February 2015).
However, in its 2015 Annual Report (filed February 2015), Tesla went quiet about the number of Model X reservations.
What accounts for the omission? Does anyone doubt Tesla omitted the information because, beginning in the fall of 2015, it experienced a large number of cancelled Model X reservations?
I invite Tesla to prove me wrong by revealing the information.
Here's what's especially outrageous about the omission of the Model X reservation information from the most recent Annual Report: to have disclosed it would have severely undercut Musk's promotional tweets about the Model 3 "preorders."
Disclosing the truth about the meager Model X yield would have underlined the point that any realistic investor should deeply discount the number of Model 3 reservations.
3. Use of 'Customer deposits' to exaggerate operating cash flow
Tesla's financial statements at the end of Q2 will reflect some $373 million as "Customer deposits" attributable to the Model 3. Tesla likely will use the increased Customer deposits to boast about healthier "GAAP operating cash flow."
Even if Tesla is silent, it can reliably count on its enthusiasts in the "analyst" community and "business press" to amplify the message with extravagant claims that Tesla's operations are dramatically improving.
However, as already outlined, the deposits don't guarantee a car, a price, a time, or even a place in line. Tesla's history shows most of the Model 3 deposits will, in fact, be refunded, after disappointment with the production date, actual price, car features, or some combination of all three.
So, the economic reality is that at least two-thirds of the Model 3 deposits are not truly deposits for orders. They are, instead, interest-free financing, repayable upon demand, just as two-thirds of the Model S and Model X deposits were.
However, 100% of the Model 3 deposits will appear on Tesla's Balance Sheet as "Customer deposits" rather than "Accounts payable".
For that classification to be other than materially misleading, Tesla needs to make full disclosure about its deposit yield history - for both the Model S and the Model X - in Note 7 to its financial statements.
And, because Tesla's "Customer deposits" amount includes not only deposits on cars not yet delivered, but also additional amounts paid on cars in transit and the value of trade-in vehicles, Tesla needs to give investors clear information about what part of the "Customer deposits" figure represents deposits on Model S, Model X, and Model 3 cars.
This is particularly true in view of the fantasy $35,000 Model 3 base price that Tesla announced.
To those factors you can add Steve Funk's recent and impressive analysis concluding that Tesla's promised Model 3 price is, at best, only a guess, and a guess made before Tesla has even priced the parts:
Design changes are generally made after [Design for Manufacture] evaluation so that the car will build cheaper or with higher quality. This is an interactive process.
Once Tesla has a firm design, Tesla can request samples and pricing from its parts suppliers…Overall cost estimates for the Model 3 will start to firm up only once Tesla has this information. So, at this stage, Tesla is unlikely to have more than an educated guess at factory cost for the Model 3.
It's worth recalling that the base Model X was originally promised for $60,000. Actual starting price: $83,200 (and, it appears, no one has yet received a Model X costing that little).
It hardly need be said that Tesla's promises about production dates have proven as inaccurate as its promises about pricing.
II. RALPH VADER & THE 'WHOMPY WHEELS'
Scott Tzu and Thom Lachenmann at Orange Peel Investments, along with Bill Maurer, have been all over the controversy over the reported investigation of the Model S suspension by the National Highway Transportation Safety Authority.
I'm leaving it in their capable hands to continue to follow the story.
But I wish to say a word about Seeking Alpha member "Ralph Vader" whose "whompy wheels" comments appear in many Tesla articles at Seeking Alpha.
Meet Keef Wivaneff
Ralph's real name is Keef Wivaneff; he lives in Australia. Wivaneff is convinced that Tesla's suspensions are dangerous, and he has gathered and assembled photos (generally from salvage yards from which wrecked cars are sold) which he claims illustrate his point.
Wivaneff has filed numerous reports with the NHTSA about the supposed defects. (And I've read many of them.)
Even though NHTSA's inquiries evidently were triggered by something other than Wivaneff's actions, many are attacking Wivaneff as a troublemaker and worse.
Tesla Motor Club commenters have accused Wivaneff of attempting to manipulate the Tesla stock price. They have claimed that because he is neither a Tesla owner not a U.S. citizen, his NHTSA reports are fraudulent.
Musk's Accusation: Fraud
Indeed, Elon Musk himself has tweeted that Wivaneff's reports were "fraudulent":
I have no opinion about whether the Tesla suspensions were (before 2014 modifications) or are defective. It's well beyond my competence. It's exactly within the wheelhouse of the NHTSA to make such a determination.
But I do have the following observations about Wivaneff:
- Several years ago, Wivaneff uncovered an Australian scam involving a company called "SunCube." He persisted in his investigation despite threats of libel suits and accusations of bad faith. And, evidently, he ultimately was vindicated.
- Based on everything I know about Wivaneff, he is neither "short" Tesla stock nor part of any association that is doing so. He is, rather, a crusader. Obsessed, yes. Eccentric, certainly. But in good faith, undoubtedly.
- Each Wivaneff NHTSA report links to a specific salvage yard example of a wrecked car with suspension parts showing. Wivaneff uses "fake" addresses because the NHTSA form provides no way for anyone residing outside the U.S. to submit information.
- Wivaneff discloses who he is and why he has not used a real address. In instances where he does not know the VIN, he discloses that as well.
- The cars in Wivaneff's photos are altogether real, and the photos unaltered.
So, no, Elon. Wivaneff's reports to the NHTSA are not remotely fraudulent.
So, let's call him a kook, as well.
Musk has doubled down, using a retweet to suggest Wivaneff is mentally unbalanced:
Elon Musk has libeled Keef Wivaneff, not vice versa. If there are any grown-ups remaining in Tesla's management, they should make Musk cancel his Twitter account.
Keef Updates the Parable.
Responding to his critics, Wivaneff made the following post recently at Yahoo's Tesla message board:
Jesus said to the expert in the law: "A man was going down from Jerusalem to Jericho, when he was attacked by robbers. They stripped him of his clothes, beat him and went away, leaving him half dead.
"A priest happened to be going down the same road, and when he saw the man, he passed by on the other side.
"So too, a Seppo [Aussie slang for an American], when he came to the place and saw him, passed by on the other side.
"But an Australian, as he traveled, came where the man was; and when he saw him, he took pity on him. He went to him and bandaged his wounds, pouring on oil and beer. Then he put the man on his own donkey, brought him to an inn and took care of him.
Jesus asked, "Which of these three do you think was a neighbor to the man who fell into the hands of robbers?"
The expert in the law replied, "Well...he was not a resident of Jericho and he can't prove he owns a donkey so he should just mind his own freaking business."
Jesus told him, "Go forth and multiply."
Presented without further comment.
III. THE OSBORNING OF THE MODEL S
Puzzling over Tesla's decision to unveil the Model 3 two years before Tesla could possibly hope to deliver that car, here's what I wrote on April 15:
Look what Tesla just did to collect only one measly quarter's worth of cash burn. It converted hundreds of thousands of potential Model S customers into people who now are convinced that if they wait only 18 months more, they can have a gorgeous Tesla sedan costing less than half as much as a Model S.
Had Tesla not revealed the Model 3 so soon, some of these Model 3 hopefuls would have stretched to afford a new Model S. With Model S demand on the life support of incentives, discounts and a nose-job refresh, Tesla certainly could use more Model S customers.
And the loss of new Model S sales is not the worst of it. The worst of it is how the promise of a 2017 Model 3 will inhibit sales of used Model S cars.
As the recent price cuts on the Model S show, the Osborning is already happening with new Model S cars.
I fully expect we'll soon see evidence of significant price reductions in used Model S cars.
IV. WHY I DON'T TRUST ELON MUSK, PART 42
Hey, who remembers this from Tesla's Q1 shareholder letter and repeated by Musk during the May 4 conference call?
Q1 Model S net orders rose 45% compared to a year ago, and grew at a faster pace than last quarter.
I wrote at the time that it was deceitful of Tesla not to release the numbers on which that percentage increase was based. The percentage increase is so high because the Q1 2015 number was so terrible.
And, quite obviously, I was right. As Paulo Santos has ably shown, Model S demand is simply horrible, and Tesla has now slashed prices.
Tesla certainly knew in early May that its Model S demand was flattening. Yet it chose to cherry-pick the statistics to mislead investors.
It did this on the eve of a capital raise. Which it earlier had denied would happen.
By now, anyone fully on notice about the business ethics of Tesla and Musk is simply not paying attention.
A Note About My Contributors
I thank Bryce_in_Texas here at Seeking Alpha for setting me straight on some accounting issues. I hope to collaborate with Bryce on some Tesla accounting pieces soon.
Also, thanks to bulbtrader at the Yahoo Tesla message board for some thoughtful posts about Wivaneff.
I also had help from investor.gator and Bonaire here, and temagami at the Yahoo site.
None of those mentioned is responsible for my errors, and none necessarily agrees with all points of my analysis.
Montana Skeptic via twitter & email
You can reach me at Montana.Skeptic@gmail.com and follow me on Twitter @MontanaSkeptic1 (which, you may be sure, I use sparingly).
Disclosure: I am/we are short TSLA VIA LONG-DATED OPTIONS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.