Gordon Johnson Profile, GLJ Research Analyst, joined Benzinga's Premarket Prep team to discuss his bear case on Tesla stock.
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00:00All right. Good morning to Gordon Johnson. You all know him from
00:05Research joining us here on pre-market
00:08Yep, which just get right to the stock that we want to talk about that you like talking about
00:13Tesla getting all those those losses back for the year give us your short-term
00:21Interpretation of what's going on perhaps a little longer term and then I will throw some questions at you
00:26so
00:27effectively with Tesla
00:30What you have is a company that
00:34You know
00:35I think that Musk is promoting Elon Musk is promoting a lot of smoke and mirrors to hide the fact that he owns a
00:43car company with declining revenue, I'm sorry declining margins and
00:47You know basically has went X growth
00:50You know, let's start off with the robo taxi
00:53So if you simply go on YouTube and look at videos
00:56You'll see that with these robo taxis literally
01:01They're driving around and within it within an hour without human intervention
01:05These things would be crashing
01:07So they're nowhere near being robo taxis despite the fact that that's what everyone calls them because must cause them that
01:15The reality is there are real robo taxi companies in the US and China
01:20And one thing that all of those companies have these are companies that have
01:24Robo taxis on the road right now is they have visual sensors that use LIDAR
01:31and by the way
01:32The all of these businesses lose money. The robo taxi business is a loss-making money pit
01:38You know Google via their ownership of WAMO loses money, you know two billion dollars roughly every year
01:45Based on you know disclosure, so it's not a great business
01:48But the problem is Tesla's cars do not have
01:51The LIDAR sensors so Elon Musk has sold, you know, eight to nine million cars
01:57And he said they all have the hardware necessary to be robo taxis
02:01So if he really wants to have a robo taxi
02:04He follows what everyone else who's successful and it's doing this is doing he's going to have to retrofit those cars
02:10I think that will cause the largest lawsuit in the history of capital markets
02:15So they're nowhere near being a robo taxi company, but that's the reason they're valued
02:20You know at a hundred times earnings when you know
02:22Typical automakers trade at six times earnings because people are giving them credit for something they haven't achieved
02:27And then if you look at the robot side, right these humanoid robots
02:31I mean that this is again something where you know has been in the market for years
02:36You know humanoid robots have been in the market for decades
02:39And we don't even know if humanoid robots are the real answer because in a lot of instances
02:44You know, you're looking at specialized robots
02:47That really solve problems. So I think that what's happened is
02:52You had musk win the vote to get you know
02:54It's 55 billion dollar pay package
02:57People saw that as a positive because some people were saying that musk would leave if he didn't get that pay package
03:03There's no way musk will leave Tesla in our view. He uses Tesla as his own personal piggy bank
03:08There's no way he was ever going to leave
03:10And keep in mind he's gonna have to sell shares to pay for taxes on those shares
03:15He got so that vote passing was not a positive and then you know
03:18The delivery numbers came in slightly better than expected
03:21But again still down year-over-year and the question again is how are they achieving that they're achieving those deliveries by offering zero percent?
03:28Financing for five years, which is works out to roughly a 13% discount on the on the car and cutting prices
03:34So you're again you're talking about, you know loss making cells
03:37They burnt 2.5 billion dollars in free cash flow last quarter
03:41We think the burn they're gonna burn more cash flow this quarter when they report to Q
03:45So I think the stock has gotten way ahead of its skis on things that aren't fundamental and you know
03:51We've seen this before with Tesla and and I think you know as reality sets back in I think the stock will you know?
03:57Take another tumble
03:58What about when interest rates actually start going down because you know, obviously we've been in a higher rate environment here
04:05None of the auto companies are killing it, but they're holding up fairly. Well, I mean eevee they've backed off on to a certain extent
04:12But what about if interest rates actually do start going down towards the end of the year and into next year?
04:17Doesn't that help Tesla?
04:19No doubt it would help everyone and not just Tesla everyone but here's the problem right what a lot of people seem to forget in
04:26these crazy times
04:27though so if you look at from 2000 to
04:312000 to 2002
04:33Right when the Nasdaq index fell from its peak to trough roughly 85%
04:39over that entire time frame
04:41interest rates were going down
04:44and
04:45And you know, basically the Fed was cutting rates
04:51So you had interest rates going down and you know, the Fed cutting rates and yet stocks imploded. So
04:58You know, the problem is when the Fed actually has to act on interest rates
05:03it's probably gonna be because we're in a recession and I think a lot of people have gotten detached from the fact that you know,
05:11The Fed doesn't have a magic pen or pencil or a magic wand where they can just all of a sudden fix the economy
05:18and so I think that
05:20Interest rates going down will not serve as the magical pill that I think a lot of people think they will does that make sense?
05:27Yeah
05:29What about the energy business here and there's been a lot of talk that the recent run-up may not have been you know
05:34Just because the delivery numbers weren't as bad as the market expected
05:38But because they were showing obvious energy storage numbers, you know this business starting to come around here for Tesla
05:44I mean, they obviously have you know, a lot of businesses, you know, they're trying a lot of different things
05:48There's no doubt about that. What are your thoughts there in the energy storage business here, right?
05:52So they're not trying a lot of things. This is just a it's it's it's a
05:56It's it's it's something that the media talks a lot about but the reality is over 90% and in some instance some quarters
06:0495% of their revenues come from selling cars and it'll be the same in 2q, you know over 90% of their revenues will come from
06:11selling cars
06:12There's no doubt. The energy business is improving
06:15It's it's because I think that you had a lot of pull in demand in California
06:20We're seeing it in the California solar initiative data
06:23with respect to
06:25NEM 2.0 installations
06:27Basically happening once those Peter out if you look at new installations in California
06:32They're extremely weak because incentives were taken back are basically eliminated in California
06:38So I think this may be a blip
06:40But clearly with Tesla the overwhelming majority of their revenues come from selling cars and that's a business where
06:48Margins are declining
06:49They burnt 2.5 billion dollars the most ever in free cash flow last quarter and their X growth again
06:56Everybody's excited on deliveries because they beat by the way, keep in mind at the beginning of this year
07:01right the street estimate on their deliveries for q2 was
07:07555,000 cars right so they did
07:10444 but that's because the street is drastically cut their estimate and it's a negative year-over-year growth number
07:16So again, I think that this company is being valued primarily on you know
07:22Robotaxis and humanoid robots and I just explained why in robo taxis
07:27They don't even have the technology to do robo taxis because they eliminated LIDAR
07:33When kovat hit and with humanoid robots, it's like they're like a freshman class, you know level of
07:42Technological advancement versus the leaders out there
07:44They're there, you know, the experts will tell you they're at least 10 years away from even having something that's
07:50You know feasible to sell to the market. So these are like, you know
07:54Fancy fantastical, you know fantasy stories that again
07:58I think Musk is using to provide smoke and mirrors for core business that is deteriorating and that includes energy energy
08:04they acquired SolarCity, you know, they made all these promises and
08:08They're you know, they don't even report, you know actual megawatts installed anymore because they basically ran that business down into the ground
08:16So I just think it's another smoke and mirrors thing to try to keep you your attention away from the deterioration in their core business
08:23When does the stock respond like to your thesis here Gordon? Like when does it actually?
08:30Tell you know, like what is your price? I think it's $27. Well, it's not from 400 to 100, right?
08:37Yeah, and then you had you know, you had the Fed do, you know last year essentially what would cause the stock to take off
08:44Was the Fed came in and bailed out the bank. So it was basically quantitative easing light and
08:49Every single stock took off
08:52And you know keep in mind this year when they reported those q1 numbers
08:56grossly grossly worse than anybody expected on deliveries cash flow you name it and that's when the stock took off right and it took
09:04Off because you know a number of things but the most important thing was Elon Musk said we're gonna do a robo-taxi day in
09:10August right so that gave people all this excitement
09:14Around something that they've been promising since 2014
09:18You know, he did the battery day a long time ago
09:21None of those promises came to fruition
09:23The 4680 battery that they're making by all intents and purposes is a joke to anybody who knows about batteries
09:29Right when they did Cybertruck day, right the Cybertruck was supposed to be, you know revolutionary vehicle
09:35It was gonna be you know under $50,000 and have you know
09:39What over 300 miles range that hasn't come to fruition. What about the Simi's right?
09:44They've been promising Simi. My point is they announced these days quote-unquote days
09:49If you will I think as pumps and then what happens is the days come whether it's robo-taxi day
09:55AI day Cybertruck day and it's a massive letdown and I don't think a August 8th is going to be any different
10:02But you know
10:03I think he puts these days out there to give people things to talk about
10:06Again as a smoke and mirrors to a core business that is declining
10:10Um, I think that you guys will agree whether you're bullish or bearish on Tesla
10:14Their core business is in a state of decline be it revenues or growth and yet
10:19The stock is valued at a hundred times over a hundred times
10:22You know forward earnings when the auto industry trades at six times
10:26I don't think that's sustainable and I also don't think that I think that suggests you're not having real new
10:32Institutional money coming into this thing. I think this is retail flows
10:35I think that's very hard to continue is clearly the stock is massively overbought brought looking at the RSI
10:41I think that's very hard to continue given, you know, the fundamental businesses in a state of disarray
10:47Is there a problem like and I think you know, I'm with you on Musk like timelines
10:51He's always been very aggressive with timelines and he's always, you know talked up the stock a lot more and then he misses those timelines
10:58A lot, you know
10:59He's talking about you know
11:00Full self-drive here ended this year early next year like robo taxi fleet come in here
11:04And I think the timeline is aggressive as well
11:07But when you really look, you know where Tesla was six or seven years ago to where it is now
11:12I mean they were making cars in a tent five or six years ago
11:15And you know, it wasn't that long ago and obviously now I drive on the road and there's Tesla's out there
11:21I mean they have you know come along now again to his timelines, you know, maybe you know
11:25He wasn't even close to hitting his timelines
11:27But when you look at where Tesla was five years ago to where they are today
11:32Don't you think like maybe five years from now?
11:35Maybe this full self-drive these humanoids actually could be a revenue source for Tesla. What if they are what what does that do to your thesis?
11:43No, you're not hearing what I'm saying. You cannot listen. I'm not the expert here, right, but I do talk to experts
11:50Who know more about full self-driving they forgot more about full self-driving than any of us know and let me be very clear here
11:59Everyone who has a robo taxi on the road a driverless car on the road right now
12:04uses LIDAR
12:06Tesla does not have LIDAR
12:09So let me be very clear here
12:10You know Tesla's whole story and evaluation is built off a lot of these. What if what if right you guys?
12:17Not I'm not picking on you guys, but the bulls on Tesla have been saying that for decades right for over a decade
12:22What if you know, it's always been eventually they're gonna have robo taxi. They will not be able to achieve
12:28More than level two, which is essentially lane assist, which pretty much every car has
12:33Drive a DAS unless they have LIDAR. So that means they're not gonna have a robot taxi a robo taxi without LIDAR
12:40That is the unanimous decision the consensus amongst every expert
12:46so there is no what if the only thing that they can do to achieve robo taxis is
12:52LIDAR with respect to humanoid robots, you know Honda had a humanoid robot ten years ago
12:58There was a story yesterday about a Japanese robot company using a humanoid robot to use a saw to cut through
13:05items
13:06Humanoid robots are not necessarily the answer just because Elon Musk says they are does not mean they are
13:12Humanoid robots has been have been in development for decades
13:17What companies who are actually profitable use and have used for years are specialized robots?
13:23So again, it's this perpetual. What if let me let me let me explain the problem here. Here's the problem with Tesla, right?
13:31So think about it right Nvidia Nvidia stock went gangbusters right and with the levels that nobody thought was possible
13:37But here's what happened with Nvidia Nvidia is growing revenues
13:42Significantly, right? They're not X growth. They're exponential growth. Their margins are through the ceiling
13:47You're talking about margins that nobody else has right?
13:51So that is a reason for new institutional money to come into the stock even if one can make the argument that it's overvalued
13:59With Tesla you have a company that's burning now billions of dollars every quarter
14:05Whose deliveries have gone
14:07Negative despite the fact that they're cutting prices and offering 0% financing. That's 0% financing
14:14I just want you guys to understand that's a de facto price cut
14:17Because Tesla has to essentially pay the bank for that 0% financing because as you guys know rates are not zero
14:23You do the math that works out to about $100 a month over five years on a $43,000 car
14:29That's a 15% discount how they account for that
14:32I don't know because Tesla's accounting has baffled many but my point is this
14:38Tesla is not Nvidia. They're not growing and they're not generating cash flow now
14:42Here's where the bear the bears myself included made their crucial mistake
14:47Kovach was a godsend for Tesla and let me explain why
14:50What happened with Kovach is you had a massive auto parts shortage?
14:54You guys remember this and and if you want to understand how massive it was
14:58Used cars were selling for more than the new car equivalents, right?
15:02That sounds as crazy as it sounds it for lack of a better word. Why was that the case?
15:08Well any auto company you could call up any automotive IR and ask them if you qualify in a new chip into your car
15:15How long do you have to test that chip before you'll put those cars on the road and they'll tell you roughly two years
15:20Why because you have to test it in cold environments hot environments and make sure that those cars are safe
15:27So because chips were in shortage car makers essentially didn't have new cars
15:32What did Tesla do they were qualifying in chips in two weeks?
15:37They removed LIDAR. They removed parking sensors. They removed sensors from the steering wheel
15:42So Tesla had cars available when no one else did so, what did that allow them to do, right?
15:48This was all because of Kovach it allowed them to jack up prices of their cars and say we're a tech company
15:54We but they weren't a tech company
15:56They were just an automotive company
15:58Willing to sell you cars with new chips and take things out of cars that other automotive companies work
16:04Does that does that make sense? Do you guys understand what I'm saying there?
16:08It
16:10Talk about your price target to like so, how do you come up with the $27 price target? I'm just curious
16:16Yeah, it's very simple. I take what I think Tesla is gonna earn in
16:202025 and put a 20 times multiple on it
16:24Automotive companies trade at six times
16:27So one could argue that my price target is aggressive and look
16:32Like it's easy to say. Okay, the stock's it, you know
16:36Wherever it's at today 230 or 240 or wherever it's at and he has a $20 target
16:41But I had a $20 target on first solar in
16:452009 when the stock was 250 and it went to 12
16:48I had a $5 target on till Ray when it was $300 and it went to $1 went below $1
16:56So the idea that stocks can't fall to reflect true valuation has been disproven over and over and over again
17:03I had a $50 target on solar edge recently when it was like close to $400
17:09You know, it's like in the 30s now
17:12so
17:13You know always had aggressive price targets. We know this
17:19Aggressive I see them as appropriate. It's just we're in a market where you have a Fed
17:24That's just pumping money endlessly into stocks and the inflation that everybody says we're not getting you're seeing in stock prices
17:31But you know Tesla, you know Tesla is not Nvidia because Nvidia has you know
17:3650% plus margins and exponential growth whereas Tesla's operating margins are
17:425.5% and they're burning cash every quarter and
17:45Like the reason why I went through that story about what happened in kovat is because that's not gonna repeat
17:51You're not gonna have an auto parts shortage anytime soon and barring a shortage
17:55You're not gonna get an increase in Tesla's fundamentals and the only reason Tesla so my point is over the 2020 to 2022
18:03timeframe there was a real fundamental case for Tesla because their their sales were growing and their margins were improving and Elon Musk sold that as
18:12We're a tech company and that's why this is happening
18:14What I'm telling you is it had nothing to do with tech and everything to do with our view them skirting
18:20Auto-safety rules and removing critical functions from their cars that I believe mates may has made them less safe
18:26But because they had cars available
18:28They were able to jack up prices if that doesn't repeat their fundamentals are going to continue to disappoint
18:33They just extended the 0% financing in China through the end of July
18:38Gordon Gordon, we are coming up against
18:42Jobs number here in about 15 seconds. So I really appreciate you coming on and we'll be keeping an eye on the
18:50Yeah, we up and nobody argues the bear side better than Gordon Johnson. You got it, but we got Gordon
18:56Thanks for coming on. Have a great weekend. I appreciate you coming on. We'll be dialing you up again real soon