Blain’s Morning Porridge, April 3^rd 2024: The Good, The Bad, The Ugly and The Damned

Elizabeth Holmes. Adam Neumann. Sam Bankman-Fried. Who might be next?

Nvidia? Meta? Apple? and Tesla? Time for a rethink on when it comes to global stocks. The Magnificent Seven is now the Fab Four… Telsa is definately out the Game. I wonder who will eventually buy it?

Now we know why Apple really canned the iCar.

After spending $10 bln over 10 years developing the Apple Car concept – Apple realised it was never likely to make any money in the increasingly competitive and commoditised EV market – even selling to dedicated Apple Addicts. They aimed for something fully autonomous, a carriage type vehicle designed to free up passengers to mingle and do other things on the road. It apparently didn’t have a steering wheel at one stage. As autonomous driving became increasingly unlikely to happen – the rest of the EV market went into hyperdrive building… cars.. Simple As.

In contrast to Apple, it took China’s largest manufacturer of domestic smartphones, Xiaomi, just 3 years to launch its own electric car. (So has Huawei.) Xiaomi is selling a good-looking car that people want to buy. The new Speed Ultra 7 Sports sedan is in the Beijing showrooms, has a 500km range, and sold out the first 89k by day one. The firm built a brand-new, automated, fully thought-out 24/7 plant, and had it up and running in less time than it’s taking Elon to reconfigure his antiquated US plant to produce a “refreshed” Model 3.

Around the globe the many firms now building EVs are doing it without the angst and drama, or the desperation that characterised the early years of Tesla chaining workers to ad hoc production lines on the factory parking lot for 100-hour weeks to desperately meet delivery promises.

The Xiaomi is nearly 10% cheaper than the basic Tesla Model 3 in China – the market that counts for EVs. Its fully integrated with the Xiaomi phone allowing all kinds of connectivity while on the go – should you feel the need to talk to your microwave. I doubt Apple are particularly bothered – they know China is a lost market to them.

Yesterday’s Q1 Tesla Production and Deliveries numbers were shocking. It delivered a mere 387,000 cars, an undershoot of 15% from the market’s already low expectations. There is a growing backlot of undelivered, and presumably unsold cars. Analysts – 32 Buy, 49 Hold and 15 Sell ratings according to Google – will be desperately scaling down their expectations on financials.

The brutal reality is Tesla is selling fewer cars, a lower prices, at tighter margins. None of these are good things. The market has noticed – Tesla is the worst performing stock on the S&P this year.

Yet Tesla makes decent cars. It should be priced as such. Problem is.. it has had its moment in the Sun. Today, it looks…. tired and jaded – and that will have …. consequences.

I’ve told the story before about the early days of aviation. The Wright Brothers may have been the first to fly and sell a plane but they quickly disappeared, eclipsed by other new manufacturers. First mover status gave no advantage in a swift moving market where innovation and invention proceeded faster than Orville and Wilbur were prepared for. Y’day, Tesla tried to blame on everything except the actuality. Tesla, the maker and shaker of EV revolution is now being consumed by the competition its early success spawned.

There is a second issue – the market is approaching saturation point for First Generation EVs. As Silicon Valley would say – Gen 1 EVs have done the S-Curve. To sell more EVs, they need to continuously evolve make them even more appealing to the remaining pool of petrolheads – to persuade them to make the switch..

A second generation of EVs is coming which will no-doubt resolve many of the critical issues exposed by the first movers. As Hertz showed when they scrapped their Tesla fleet, there is the problem of second hand EV values. The difficulty is selling a car that might need a $15k battery replacement – that’s a value proposition killer for any new Gen 1 buyers. How many miles the car has done not the issue – it’s the charging history profile that matters. 2^nd Generation cars will have simpler to replace batteries, radically changing the value proposition – but creating a problem of non-obsolescence for makers. Batteries themselves will become more efficient, lighter, solid-state, and faster charging – resolving range anxiety and charging concerns.

In terms of competition it’s not just Chinese makers that have entered the fray. The global auto-firms are also delivering attractive, effective new EVs that customers are buying. Compare and contrast with Tesla: three old models based off the same platform, and a CyberTruck that even Musk admits is difficult.

Where is Tesla on new models, new batteries and competition? I would ask the CEO, but he’s off hob-nobbing with Donald Trump (not a good look when 80% of your buyers are Democrats), running a Rocket-Ship Company, while wrecking Twitter.

Don’t waste your time trying to construct upside scenarios for Tesla. There are none. Self Driving is not a thing – and if it is it will be a commodity. RoboTaxis was a great stock barker gimmick – it was never going to happen. Tesla is selling less cars today than it did last year. The EV market will continue to grow, but Tesla is unlikely to be leading it. Competitors are making cheaper, better cars than Tesla.

Lessons Learnt?

Of course, if you have been a regular Porridge Reader you knew all this was going to happen. I’ve been saying Tesla was chronically overvalued on hopeless pipedreams for 8 years. The cost was personally horrendous – by disinvesting Tesla I missed massive upside when the stock went stratospheric. I made the mistake of thinking like an investor rather than a trader – misjudging the market; how it was thinking, and what were the forces driving it. FOMO, Charisma and Narrative have the power to move markets – be suspicious of them.

How well I remember a few years ago when an Elon Musk fan-boy posted an hilariously insulting video about just how absolutely wrong I was about Tesla – lambasting every aspect of my being.

Cathie Wood is apparently still a believer – expecting Tesla stock to hit $2000 within 3 years on the basis of its enormous RoboTaxi revenues (currently zero) and the AI potential of its autonomous “FSD” full-self-drive software (which is only self-driving in the sense you still need to drive the car.) Musk needs FSD to juice up the price of the car by it extra $12,000 subscription price, which is why it’s a mandatory requirement sales staff demo FSD to buyers before they drive it away.

A few years ago I bought a slug of a 3 times levered Short Tesla ETF. For every dollar Tesla’s stock falls, I get three! Oh, what a clever boy I was…

Over my 40 years in finance I’ve come to realise you can’t beat the short-term stupidity of markets, but long-term common sense usually triumphs in the end. Its taken longer over the past 15 years because of the distortions of overly cheap money boosting speculation and mispricing risk. As my losses on Tesla prior to 2022 highlight my cleverness did not do me much good – irrational markets remain irrational longer than great thinkers remain solvent, as they saying goes.

Now the mood has changed: in Tesla’s case the bite of market reality is likely to prove particularly sharp.

Market behaviours over the past 15 years demonstrate just how bad “rational expectations” and “efficient market theory” are as rules for predicting how individuals will behave in systems like markets.  Last week the distinguished Nobel Prize wininng Economist Daniel Kahneman passed away. His 1979 paper with Amos Tversky; Prospect Theory: An Analysis of Decision under Risk showed how investors will tend to weigh potential gains more than potential losses – its complex, but read the abstract on the above link.

Kahneman explained how the human brain is weighted across two different decision-making processes which can create “systemic errors in thinking”, and that decisions will be influenced by bias and “anchoring”: famously that if you tell doctors there is a 90% chance a patient survives a procedure then 85% of doctors elect to proceed, but if you tell them there is a 10% chance of death, only 50% go ahead.

It explains markets well:

• Fast thinking is what traders do; responding with snap buy/sell decisions on what is occurring in markets – the quality of the decisions being entirely based on the available information.
• Slow thinking is what investors do; using their intellect to spot cheap/rich opportunities when the market is making mistakes in its valuations. The less people understand the more they tend to rely on fast thinking – relying on their initial judgement which is based on bias and anchoring.

I wasn’t wrong in my fundamental assessment of Tesla – I just didn’t understand the behaviours and distortions that led the markets to believe it for so long. People were told there was a 90% chance RoboTaxis and FSD were real… someone was telling porkies.

For the record this morning Tesla is at $166 this morning, down 60% from its record high in $407 in Nov 21. Give me a shout when its $16 a share – giving it a market cap around the same size as Ford… That’s when it becomes an infinitely different market bet and someone might get their wallet out for the IP… such as it is….

Out of time and off to check the boat after another blow last night…

Bill Blain

Strategist, Author of the Morning Porridge

Wind Shift Capital