The world's investors say Tesla (Nasdaq: TSLA) is the most valuable car company in the world. GLJ Research's Gordon Johnson isn't buying it one bit.
CW: Tell us a little about GLJ Research and what you cover?
Johnson: We’ve covered the renewable energy space for some time. In our coverage, we’ve seen a number of manias in solar stocks. The first of which was from 2007-2009. Today, the mania surrounding electric vehicle stocks reminds us of solar back then (TSLA at ~$2,100/shr pre-split is FSLR at $311/shr in 2008 before competition arrived).
CW: Can you tell us a little more about what causes these “manias”?
Johnson: A lot of investors in today’s market not only have never seen a down market but have never seen a mania. Typically manias are defined by exuberance around a new “technology,” and manias are busted as the numbers don’t match up to the mania. The mania in Tesla’s stock we believe has been based on perpetual promises of products that were not only delayed—but never took place.
CW: And you think the excitement around Tesla is such a mania?
Johnson: Yes. You see what’s happening with the founder of Nikola and its stock; it went from $80 to $20 because a short report was written and a video posted where they roll a truck down a hill that actually didn’t have an engine-- and it didn’t work.
CW: Tesla has done this kind of thing with a number of products.
Johnson: When they acquired solar city, Elon Musk had solar panels that were nonfunctional and put them on a roof of a “fake house” located on the set of desperate housewives (you really can’t make this kind of stuff up – the facts of it all are stranger than fiction). That was used to justify the $2 billion acquisition of Solar City. So, you put non-functional panels on a “fake house." How is that any different from rolling a fake truck down a hill?
And the robotaxis? One million robotaxis and we now know that they likely didn’t even have FSD technology capable of being able to fully self-drive in 2020 as was claimed. [Tesla was] saying that they would have a 620 mile per hour one charge battery in 2015 in two years. That has also never happened.
CW: But just because a company doesn’t meet every milestone, is that really equivalent to misleading the market?
Johnson: What many Tesla bulls will tell you is that Elon Musk is a little late on introducing products. However, many of these products aren’t just late—these are products that are never happen. But on the back of these promises, TSLA is raising billions of dollars in capital to fund losses in the core business of selling cars.
Typically, when this kind of stuff happens, the federal trade commission comes in and says: “You’re selling full self-drive to people when you don’t have the technology capable of doing full self-drive; please stop selling that “technology” until you have that capability.”
It is almost like selling something that doesn’t exist. But for some reason, Tesla hasn’t been called out on it. The FTC is not stepping in and saying they are raising billions of dollars on the promise of products that never get introduced.
CW: So, Tesla’s stock has all the signs of mania.
Johnson: Yes. All the signs of mania. But we also believe it has all the signs of a story that could be brought down in our opinion if regulators decide to do something similar to what they did they did to Nikola. Or they should simply look into some of [Tesla’s] promises. But that hasn’t happened yet.
CW: And you see a broader problem of mania in other EV stocks too?
Johnson: You’ve had a number of electric vehicle companies that raised billions of dollars incuding NIO.
But they are doing it on the floor that Tesla has created. The question is, is it real? The reality is between 2011-2019, despite billions of dollars in taxpayers' incentives, you’ve only seen market share growth from 0.3% to 0.72% globally. People just aren’t buying these cars despite the government throwing billions in subsidies at the EV industry (i.e., we’ll give you $7.5K if you buy a $125K TSLA instead of a $125K gas-engine Mercedes Benz).
CW: Couldn’t all this just be attributed to the pains of a new industry? When it does take off, won’t Tesla be the clear winner in this space?
Johnson: I do not think Tesla is not going to be able to grow into its valuation. To hit the valuation they need to show tremendous growth and their revenue essentially peaked in the fourth quarter of 2018. They were slightly higher in the fourth quarter of 2019, but you’re not seeing exponential growth in revenues. In fact, in 2020 already, they have cut the price of their cars globally a combined 11 times. So, while volumes are strong, there is infinite demand for TSLA’s cars if they gave them away for free; what matters isn’t volumes; what matters is revenues and profit.
CW: They are about to report. What do you expect?
Johnson: I think they are about to report a record quarter, but their deliveries should have doubled from the fourth quarter of 2019 because they have a new facility in China. That facility is 500,000 cars. Their sales should be growing exponentially, and their  guidance is 30-40% delivery growth versus 50% growth last year. So their growth is actually slowing, despite the fact that they are being valued at 13 times their revenue. And trading 13 times its revenue means they have to grow exponentially. Because when you trade 13 times your revenue, effectively what that valuation suggests is we’re going to pay you 100% of revenue next year for 13 straight years. That means they need to grow revenues to cover COGS, OPEX, taxes, employees, etc. If their revenue isn’t growing, a lot, these valuation levels make no sense.
CW: How long have you been bearish on Tesla? Was there ever a point when you were bullish on the stock?
Johnson: It’s easy to say Gordon Johnson is dead wrong on Tesla. Because I am right now. We initiated Tesla in late 2018, or early 2019 when it was [trading] at $300 a share. And at the low, when we were covering the stock was at like $180. So., there was a point in Tesla when we were very right.
Then early this year it rose to $950 then quickly dropped to $350 when the pandemic hit. Then, when Tesla’s stock hit $350, the U.S. federal reserve announced QE Infinity and proceeded to flood the stock market with $3 trillion of newly created dollar bills and every speculative stock went to the moon.
The main reason we believe Tesla’s stock is where it is right now is because of what the fed is doing. They’re literally flooding the banks with dollars and the banks have nowhere to put them because interest rates are so low; this means the stock market is the only place for these excess dollars to go; and that’s where they’re going. So the stock market in the U.S. is completely broken in our view; if the Fed were to end its supportive policies, the market would implode (this is why it’s broken; there is no real price discovery; or, stated differently, you can’t lose on the long side; but, this has never ended well – see Weimar republic for how trying to corner equity markets ends; the Fed’s policy is an indirect attempt to destroy the purchasing power of the dollar; this is how social unrest turns into civil war; but, many investor today haven’t studied how currencies are interchangeable with stocks, and social unrest, so the “experiment” will continue). But, the U.S. Fed (other global central banks simply follow the Fed), not execution, is the major driver of Tesla’s stock.
CW: CEO Elon Musk hasn’t shied away from throwing shade at short sellers in the past like launching sales of short shorts. What is your opinion on this matter?
Johnson: What I would say there is go look at what happens to companies previously focused so much on short-sellers. I would also say it’s in Tesla’s interest to answer the questions the “short-sellers” have. Those questions center on why is their CapEx falling in 2020 when they just built a new plant in China? Why is there OpEx falling in 2020 when they just built a new plant in China? Why are your receivables rising when you affectively collect cash on delivery? Items like that. Where are the one million robotaxis you promised investors last year that you used to raise $1 billion? Where is the battery swap technology you displayed in 2012, and used to get roughly $300mn from CA taxpayers? And on and on.
CW: It doesn’t seem like Tesla’s hyped battery day was enough to impress investors. What was your opinion on Tesla’s unveilings?
Johnson: If you look at Tesla’s R&D as a percent of revenue, it went from 16% in early 2016 to roughly 4% today. It’s not just batteries that they’re looking to develop, they are looking to develop a Cybertruck, a Semi, a Roadster, an ATV.
How are you going to spend virtually nothing on R&D? And yet you’re going to leapfrog LG Chem, CATL, Panasonic, who are spending billions of dollars a year on R&D to create and put out advances in battery technology?
CW: Tell us a little about the battery space and how it relates to Tesla. I know you have spoken at length in the past about issues there.
Johnson: Look at what VW has said. They said would effectively purchase enough battery capacity to produce 4.5 million EVs over the course of now through 2023. That’s 73% roughly of all the planned capacity from the two largest battery manufacturers. That’s nearly half of all the battery capacity over the next four years. That’s just one company, that’s VW. There are 15 other companies that have locked up battery supply that Tesla has not locked up.
Here’s my point: Battery prices have stabilized and they’re about to move higher because it’s a supply-demand issue. So many of Tesla’s competitors have locked in battery supply, whereas Tesla has not. It was alleged the other day that Tesla is looking to buy a 10% stake into LG Chem’s battery spin-off.
We believe that now Tesla is scrambling hard to try to find battery capacity, because they don’t make their own batteries—a big misconception is TSLA makes its own batteries, and thus has some kind of advantage (this concept is simply wrong). They buy from Panasonic CATL and LG Chem.
Also, many of TSLA’s competitors have purchased most of the available battery capacity. So now Tesla is going to have to pay above-market prices for batteries; how do they lower costs in this scenario? We believe this puts them back to significant structural losses next year. We believe that’s why Elon Musk was on Kara Swisher podcast was complaining about people not understanding battery day.
How do you have a battery day and not introduce a battery?
CW: What do you say to those investors who may know about Tesla’s issues but still think the company, as a whole, is way ahead of competitors?
Johnson: Everybody says Tesla is 10 years ahead. If they are 10 years ahead, and they take a 10% stake in LG Chem, that shows you they are not 10 years ahead. That shows you there’s just another guy out there buying batteries from a guy (LG Chem) who’s selling them to everyone else.
CW: While you remain bearish on Tesla and to a lesser extent maybe the electric vehicle industry, do you think that your views on the EV space will change in time?
Johnson: The world does not currently have the infrastructure or demand to drive a significant uptake in electric cars.
My guess is the average price of an electric car is probably around $45,000 to $50,000. That’s way too pricey. If you look at what happened in China, GM introduced a very small electric car in China. In its first month in China, it sold about 15,000 cars; Tesla only sold about 11,000. So, it outsold Tesla in its first month. The price of this EV car from GM is around $8,000; that’s where folks can afford cars.
As for reliability, electric cars just aren’t there yet. Do I think they’re going to grow? Yes, I do. Are they going to grow the levels that people think they’re going to grow to? No.
CW: The market certainly has not grown as fast as many thought it would, myself included.
Johnson: Go do a Google search and look back to February 2012. See projections in what EVs are going to be as a percent of total car sales, it’s probably around like 20-30%. And the number is actually 1.72%.
Consider that figure for a minute; 1.72%. Over the past eight years. And that is despite billions of dollars in subsidies given. Are people with kids going to buy an EV and go on a road trip and worry about charging stations when there is so little infrastructure? I doubt it.
Are rich guys who don’t leave the city going to buy EVs? Yeah, but that’s 1.72% of the global market, as per the actual data.
So, I think there’s a lot of euphoria that’s not only unmet by the data, but it's unmet by the fact that you have billions of dollars being thrown in incentives. f
CW: Considering many of our investors are based in Asia, how do you feel about some of the Chinese electric firms such as NIO (NYSE: NIO), and ones that have recently gone public like Li Auto Inc., (Nasdaq: LI) and XPeng Inc. (NYSE: XPEV).
Johnson: I don’t have the valuations in front of me—but that valuations are too rich. I think NIO was extremely close to bankruptcy, and they did a couple of capital raises in the U.S. (that the U.S. gov’t allows this is amazing; those investors will likely never be made whole).
If you talk to GM’s CEO, which I have, or you talk to Ford’s CEO, which I have, or you go to a U.S. auto show and you ask them about EVs. I don’t know what they are saying now, but three years ago they basically said they could crush Tesla if they wanted to, but that they don’t because EVs are not profitable. That’s still the case, but these companies are being forced to compete. TSLA still loses a LOT of money in its core business of selling cars. Again… we’re in an EV mania right now. Bloggers get more TV time than analysts; and, if you listen closely to the analysts on TV, they are predicting TSLA enters businesses they are currently not in to justify the current valuation – i.e., the guy on Fox Business who said TSLA’s battery day was just as important as the invention of the light bulb, only to find out at battery day TSLA did not have a battery to unveil (this is as ludicrous [pun intended] as it sounds).
CW: How do you feel the industry would do if Joe Biden is elected president, who has proposed to commit $2 trillion in subsidies for renewable energy
Johnson: Anecdotally, solar stocks been on an absolute tear. They’re trading at multiples of revenue. And I think that is due to an expectation of a Biden win. .
But if you look at the Solar Tan index when Obama was President over the eight years. There was euphoria in what he was going to do for renewable energy and he talked a lot about it. And I think the Solar Tan Index over the eight years was down like 70 or 80%. The euphoria in his support for renewables didn’t match up with the actual investment was because the U.S. is a very small market as a percent of total renewable energy.
CW: And the Green New Deal or something similar?
Johnson: As you know, it isn’t just a Biden presidency that would enable the Green New Deal. Dems also have to take the Senate. I don’t think that’s as easy as people think. So you need Biden as a president and you need the democrats to take the senate. If that doesn’t happen, I think a lot of the euphoria in the solar industry in particular will fade. And even if it does happen, states determine energy policy for the most part, and the Red states are not going to fire a bunch of nat. gas workers because the Dems want to install among the most inefficient/expensive forms of energy in solar (California’s energy cost is up 6x vs. the avg. in the US 2011-2019, and they are currently experiencing rolling blackouts similar to that seen in third world countries – much if this is due to intermittent-peak-load solar power being erected and distributed base-load nat. gas and nuclear plants being torn down).
CW: What message would you like to share with investors about the market?
Johnson: I think that everybody’s looking two-three years out and stocks are trading at multiples that they’ve never traded at before.
With some respect specifically to Tesla and EV companies, I would ask investors to focus on the fundamentals and not euphoric talk from talking heads on TV. Tesla gets more air time than any other company, despite the fact that EVs are 1.72% of the global auto demand, on TSLA revenue that essentially peaked in the fourth quarter of 2018 (with a CEO that has used investors’ stupidity to raise BILLIONS on products that do not exist); don’t continue to be the “mark”; buy companies that are growing and generating cash flows; not the opposite.
The fact is Tesla needs to post tremendous growth every quarter in their revenues to grow into their valuation—and we just don’t think it’s going to happen.