One of the amusing phrases that are part of how institutional brokerage firms interact with institutional investors is "putting lipstick on a pig." The phrase is used to describe aggressive sales pitches from the brokers to portfolio managers about what are usually low quality companies that often also have additional underappreciated problems or issues that will affect the company's stock price very badly. The ever enterprising brokers, however, who love those high fees for underwriting equity offerings, show no shame in attempting to sell such garbage as it is actually the responsibility of a portfolio manager to thoroughly analyze any security that is being considered for purchase.
Not all portfolio managers are the best and brightest, however, and so brokerage industry manipulation wouldn't be practiced unless it was often successful. One of my more amusing memories of my long professional investing career was what I called "the roadshow lunch" hierarchy.
For offerings of good quality companies where there would be strong demand, the road show lunch would usually consist of a simple buffet table with some sandwiches and some salads where the investors could serve themselves. For medium quality companies where some effort was needed to build a solid book for the offering, there would usually be a sit-down lunch served with some chicken and there would be wine glasses at each place setting in case someone wanted a glass of wine to wash down the usually overcooked chicken. The really fun lunches, however, were for the really bad offerings (for companies probably on an eventual path to Chapter 11!) where at the entrance to the meeting room there would be a full bar serving mixed drinks, beer, and wine and lunch would usually be a really good cut of beef along with servers actively filling all the wine glasses at each table.
For Tesla's (NASDAQ: TSLA) next securities offering, I would guess that portfolio managers going to the road show lunch can look forward to the full bar treatment and a nice cut of roast beef but there has been another Tesla related event last week that was also similar to putting lipstick on a pig. The event was the "unveiling" of Autopilot 2.0 - that avidly pre-tweeted and supposedly momentous Tesla "product announcement" (except for the fact that there is not yet actually a product that Tesla's customers can currently use!).
Tesla customers now buying a pig in a poke…
Tesla customers will now become familiar with another piggy idiom which is the old phrase about "buying a pig in a poke." Buying a pig in a poke, however, might actually result in at least some tangible benefit as you still may get either a cat that can catch mice or a dog that can help with hunting instead of the pig although the hoped for value of the pig would still be more than either the cat or the dog.
Tesla customers, who have already been misled by being charged $2,500 for the irresponsibly named Autopilot, at least got something for their money in the form of reasonably good lane keeping software, a parlor trick to amuse their friends with the parking and summon features, some clunky lane changing software and an abruptly functioning TACC implementation (as I described in this article), and supposedly an Automatic Emgency Braking (AEB) function which I discussed in this article but which has also been shown in various settings to not work (as shown here, here, here, here, and here).
The new Tesla "master plan" also now seems to be charging customers for stuff that doesn't even exist. Instead of being charged $2,500 for a "beta test" version of Autopilot, new Tesla customers are now being asked to pay $5,000 for "Enhanced Autopilot" and another $3,000 for "Full Self-Driving Capability." And, umm, the reason that Tesla customers no longer have the option to still pay only $2,500 for the previous implementation of Autopilot, is that Mobileye pulled the plug on Tesla after Tesla's irresponsible and overly aggressive implementation and sales pitches about Tesla's supposed capabilities.
The visions of Tesla, Tucker, and Musk
Trying to charge customers for stuff that doesn't yet exist is also usually a pretty good indicator that a company's financial circumstances are becoming more and more desperate. There is also actually an interesting parallel with the ill-fated Tucker Automobile Company where one part of the overall scam was to pre-sell accessories with the promise that customers who prepaid for the accessories would have priority on the waiting list for Tucker cars when they were delivered.
Such a ploy is another uncomfortable parallel with the money grab that occurred after "announcing" the Model 3 probably two years before it would even have a chance to be in volume production. Of course there are other interesting parallels between Tesla and Tucker as well between having founders that were considered disruptive visionaries at the time, significant personnel turnover in automotive operations, and repurposing an obsolete plant for initial production activities.
Anyone not familiar with the events at the Tucker operations may find this article and this article of interest. For those who may claim that Tesla is already a success given that they have delivered over 160,000 vehicles versus the 51 vehicles delivered by Tucker, the principal enabling difference is what is now almost a completely free cost of capital in the current environment versus a more normal cost of capital when Tucker was attempting to introduce its vehicles.
If it were not for an eight year long Federal Reserve provided funny money environment, Tesla probably couldn't have even gotten to the stage where the Model S was ever introduced. But, in the current environment, where money is essentially free and many investors are foolish, Tesla's almost $3 billion of cumulative losses have been funded so far by investors who seem to have blinders on that at least another $5 billion will be needed over the next three years (which I described in this article). Even with such a low cost of capital in Tesla's development so far, such a funding environment will probably now start to be a lot more difficult given the Solar City merger plans. The could end up being déjà vu all over again as the original Tesla (the visionary inventor) went broke, Tucker went broke, and I guess we will have to wait in suspense about Musk's future.
The price of Autopilot increasing from $2,500 to $8,000
But, back to a discussion about Tesla charging $8,000 for features which do not currently exist as such a development has a whole bunch of interesting issues.
The first issue is that the cost of the previous Autopilot has now doubled from $2,500 to $5,000. That doesn't sound like a good deal to me and I believe the increase will result in a significant amount of customer pushback - including plunging orders for Tesla vehicles. If you read the description of "Enhanced Autopilot" on Tesla's website, it has exactly the same features as the previous version of Autopilot - except for the fact that it is not yet even available! The reason why I have described that the price has actually increased to $8,000 is that I also believe that Tesla's "autonomy" development path was implied to be part of its Autopilot development efforts and that Tesla buyers would receive such capability in future OTA updates.
Aside from the completely incompetent product planning, or lack thereof in such a transition (which even makes the Model X introduction look marginally competent in retrospect!), the large price increase also indicates that Tesla regards its customers as pigs available for slaughter. Tesla fans will claim that "Enhanced" Autopilot is so much more capable in that the next implementation has four cameras instead of one and increased capabilities of the ultrasonic sensors and supposedly 40-times the throughput in processing power for processing radar, image, and sensor data but…that sounds to me more like what Tesla should have probably implemented in the first place prior to even releasing the initial version of its prematurely introduced version.
The fact that Enhanced Autopilot is not yet ready for release and that current Tesla deliveries now have no "driving assistance" features at all also raises lots of additional uncertainties about what will actually be released and how well it will be tested given that Tesla is now in even more of a rush to deliver something. This is also a company that apparently didn't even take the time to fully understand how Bosch's radar sensors could be used for roughly two years after they were initially introduced into Tesla vehicles and not until after two Tesla customers had died when their vehicles did not see stationary objects in their path.
Although Tesla will now be installing more cameras, ultrasonic sensors, and processing power in each car, the key to a safe and successfully deployed system is extensive development, validation, and testing procedures. What is now rumored to be a December first release of Enhanced Autopilot is probably at least six months too early given the sudden shotgun divorce between Tesla and Mobileye in July. Since Tesla has never been responsible in communicating about stuff that doesn't work with either the company or its vehicles, I'm sure the continuing path of Autopilot will be both shrouded in secrecy and promoted aggressively with empty hyperbole.
Autopilot Interruptus an indicator of significant additional management problems
This entire sequence of events is also yet another indicator of how poorly Tesla is managed on every level. Would any company willingly "de-feature" its products before it had new fully featured products available? The answer to that question is obvious and Tesla now being stuck without even basic driving assistance functions shows that there are a lot of things very wrong at the company.
To begin about those things that are very wrong, I would guess that most of the features and capabilities in Autopilot 1.0 actually came from Mobileye given that the termination of that relationship has now resulted in Tesla not currently having any active safety or driving assistance features. The fact that Tesla has actively attempted to mislead both customers and investors about the company's supposed "proprietary" capabilities in Autopilot 1.0 when almost all of those capabilities came from Mobileye (which is very well described in an excellent article by Paulo Santos) is essentially fraudulent in my opinion on many levels.
Proof that Tesla never had such capabilities is now shown by Tesla currently having no product at all after Mobileye terminated the relationship. If Tesla also essentially had no significant proprietary capabilities in the initial version of Autopilot 1.0 and that the systems behind Autopilot 1.0 are now being replaced with new systems, that also effectively invalidates the claimed relevance or "competitive advantage" of Tesla gathering all those "millions of miles" of driving information from a system that will no longer be used.
The sudden absence of a driving assistance feature in Tesla vehicles also show how poorly the company is being managed internally. This is no different than the Model X "production hell" episode which was also self-inflicted and showed very poor planning and incompetent internal capabilities in many different business disciplines.
If Tesla was effectively managed, then "Enhanced Autopilot" would already been ready for release. Since it is not, customers, who are induced to still pay for it upfront even though it is not yet available (since it will cost even $1,000 more if purchased subsequent to the initial order of a vehicle), are left with the risk of an unknown delivery schedule and also, what is even worse, no visibility on whether adequate testing will be done on a product that will obviously be rushed to market.
The next thing that is wrong about the Autopilot Interruptus episode is the financial irresponsibility of such events by a company that has already burned through almost $3 billion of investor capital.
The additional development costs of suddenly having to replace a vendor's systems with an internally developed systems is probably at least $200 million. That may be just a few lumps of additional coal being shoveled into Tesla's cash devouring furnace but it is still a significant amount of capital. Given such additional spending would also result in Tesla understating its future capital needs, such a possibility of additional development costs would also now appear to be in retrospect another material omission from both the disclosure documents filed and referenced for Tesla's May 2016 equity offering and also the continuing sequence of S-4 filings for the proposed Solar City merger. The fact that Tesla now acts like just replacing Autopilot with a new system after being forced into such a course of action by a previous vendor terminating their relationship with Tesla is also just one more example of Tesla's dissembling sleight of hand in its overall communications policies.
Charging $3,000 for "Full Self-Driving Capability"
The only thing positive I can possibly say about charging customers for a product that is probably three years away from being ready for release is that Tesla does at least add that the product could be delayed by extensive software validation and regulatory approval. They probably should have added disclosures, however, that customers buying such features now are providing Tesla with an unsecured $3,000 loan with no interest payments. Similar to the cash grab from the premature Model 3 introduction - cash which has also already been burned through twice at this point - such an additional cash grab is another example of Tesla's irresponsible behavior. But, just like institutional brokers know that a full bar and a big cut of roast beef will sell bad stock deals, Tesla knows that it still has enough trained seals to throw money at them if they are gulled into thinking that Tesla has some sort of innovative product.
I think Tesla's overly aggressive and very premature introduction and selling of "Full Self-Driving Capability" may also have an unanticipated negative consequence. I think that Tesla's new claims about its supposed future capabilities will finally be the catalyst for more regulatory scrutiny of all driving assistance and "autonomous" driving developments. It is one thing if lots of companies are privately developing and testing such capabilities but Tesla now attempting to charge customers for them will result in the regulators finally waking up that rigorous development, validation, and testing standards need to be put in place before customer drivers are allowed to have access to such supposed capabilities. This is especially so given Tesla's previous history of aggressively introducing and promoting the original version of Autopilot.
Additional relevance of "Enhanced Autopilot" and Self-Driving for the Model 3
The Model 3 hype which gulled people into collectively providing Tesla with almost $400 million in an unsecured two year interest free loan was also probably partly based on customers thinking that $2,500 for Autopilot wasn't all that much to pay on top of the supposed $35,000 base price. I would guess that a lot of such customers were also induced and manipulated into plunking down their $1,000 by thinking that they would be buying into the overall Tesla ecosystem where the supposedly advanced features of the Model S and Model X would be available to them on a much less expensive base model. When Autopilot cost $2,500, such an assumption was at least somewhat reasonable.
But, now that the original version of Autopilot is no longer available and "Enhanced Autopilot" is now $5,000, I believe that a lot of Model 3 deposit payers will feel deceived. Since Tesla has also previously discussed the path of possible future full autonomy as part of ongoing Autopilot development and also heavily promotes the "Over the Air" (OTA) update capabilities of Tesla vehicles so that such vehicles can always be "current", I also think it would reasonable for most Model 3 deposit payers to have assumed that additional future capabilities in the Autopilot suite, including incremental capabilities towards eventual full-autonomy, would have been included in future OTA updates.
As such, to now have an additional charge of $3,000 for the future "self-driving" capabilities is another item where I believe many Model 3 deposit payers will feel deceived - and which could result in many deposits being cancelled. In fact, I think it was a notable omission in the "Enhanced Autopilot" and "Full Self-Driving Capability" announcement to not be more explicit about what Model 3 buyers will be charged for those capabilities. I'm assuming the Model 3 buyers would be charged the full $8,000 for the two features which significantly changes the economics of the Model 3 for both buyers and the company.
For potential Model 3 buyers who were induced by thinking they were buying into the Tesla ecosystem at a $35,000 price point, that price point is now effectively $43,000 even without other additional options. For those who assumed that $2,500 for Autopilot was at least a reasonable price for both the additional option and the implied future updates, that option has now effectively increased over 200 percent in price to $8,000. Even if a deposit payer included an assumption of $2,500 for the Autopilot option, the new likely price of $43,000 for a Model 3 is $5,500, or over 15 percent more than an assumed price of $37,500 for a Model 3 with Autopilot.
There are also some other possible unanticipated negative consequences for Tesla in how all of this has evolved that are even more negative for the Model 3's possible gross margins. Tesla's announcement last week was that ALL future Tesla's will have the new suite of cameras, ultrasonic sensors, and a more powerful processor and the Model 3 was mentioned in being included in those plans. The Enhanced Autopilot and Full Self-Driving capabilities in Tesla vehicles will be a very high margin option if purchased as I estimate the cost of the additional cameras, sensors (which also probably includes more capable radar from Bosch as well), and processing capability to be around $1,200 per vehicle versus the $8,000 price collectively for the two options.
But, there might be a lot of potential Model 3 buyers who will still make the "electric car" decision to go ahead with their Tesla Model 3 purchase but who then do not spend the extra $8,000 for Tesla's reconfigured Autopilot development path. On those vehicles, whose unit cost will probably be at least $35,000 (as Tesla's hoped for Model 3 profitability would depend on overpriced options being purchased), that unit cost will increase by $1,200 per vehicle, or almost four margin points. Maybe that means nothing at Tesla which has never achieved product margins that it has chronically misled investors that they are hoping to achieve but I do think such margin degradation will be noticed by investors given the huge scrutiny of the Model 3 launch. Such scrutiny will be especially accentuated given the fact that the Model S and Model X have not yet ever produced profits for the company and Tesla will now also be a big happy family with the cousin's money losing Solar City operations being added to the unprofitable mix.
The bigger picture of Autopilot Interruptus
There is now apparently another reason for Tesla to have attempted to "push a pie into the face" of its critics with its upcoming Q3 financial report and that is the likely Q4 delivery plunge given current quarter orders may decline significantly with no current availability of any Autopilot features. As Musk mentioned in his memo at the end of August, Q3 may be the last chance to possibly show a profit before the increased spending required to launch the Model 3 but an uncommunicated additional issue at that point was that Autopilot was not going to be available in new vehicles for most of Q4.
Given the likely delivery decline in Q4, the window between the Q3 and Q4 results would be Tesla's only chance to possibly raise more capital at current stock price levels before the stock may decline significantly once the possible sequential decline in Q4 deliveries would be more widely perceived. I think that is also another reason for accelerating the earnings reporting date so that a stock offering can happen as soon as possible before deteriorating business trends in Q4 are more widely recognized. Musk of course claims the company doesn't need any more money but capital spending plans which have been previously communicated plus working capital growth and debt repayments will result in the company having less than $500 million in cash at the end of 2016. Whoever is involved in drafting the S-4 also apparently understands the short time frame that Tesla has for raising cash and that is why a possible financing by the end of 2016 is mentioned in that document.
As with everything related to Tesla, there is always both a lot more possible issues with any of the company's activities than the company is ever willing to acknowledge and a lot less substance and reality to the company's operations and products than the company is willing to admit.
Given that Tesla currently has no driving assistance features available at all, it is very clear that most of Tesla's imagined technology lead and supposed competitive advantages were actually just self-aggrandized claims about what were really just capabilities provided by a vendor. Tesla's new claims about "40-times more processing power" is also not an indicator of a competitive advantage or any proprietary technology as it is based on Nvidia's systems that any auto manufacturer can also use.
The additional complication in Tesla's claims is that they go well beyond just aggressive self-promotion given the company's huge capital needs. Tesla is not only attempting to manipulate customers into thinking less is more but its tenuous balancing act with public capital markets also includes attempting to put lipstick on the pig of its current operating problems and product development challenges. Tesla's sleight of hand of attempting to describe an unavailable product as a significant "new" product introduction shows Tesla's increasing desperation at maintaining a positive narrative given its need to raise huge amounts of capital.
Tesla's desperation is also now bordering on tricks used in common con games. Raising the price of existing functions of the previously available product by 100 percent when they are not even available is a classic con game tactic where part of the con is to attempt to raise the perceived value of the "object" which dupes the marks into becoming more enthusiastic about something that is now of supposedly greater value. Making broad claims about future attributes of something that are impossible to verify is also a typical part of common con games. Although the interruption of Autopilot availability is a difficult situation for Tesla, trying to mislead both vehicle buyers and investors about the reasons why is a new low for Tesla which does border on typical con games as described above.
Such a difficult situation is also of its own making similar to many other things the company has done poorly such as late and problem filled vehicle introductions, irresponsible and overstated product feature claims, and undisciplined capital management. The difficult situation for Tesla with the Autopilot interruption will also result in even greater future scrutiny of the company about the timing of reintroducing the now unavailable features previously in Autopilot. There will also be heightened scrutiny of the company about possible safety risks from not fully developed and tested features being rushed to market. All of the things described in this article continue to significantly raise the risk profile of owning Tesla stock.
Disclosure: I am/we are short TSLA.
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.
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