Rather than revolutionizing the auto business, Tesla seems to be on a path to bankruptcy court, according to a hedge fund manager who is betting against the electric car company.
Tesla, which makes its batteries at the taxpayer-subsidized Gigafactory near Reno, is trying to defy the laws of financial gravity, said John Thompson, founder and chief investment officer for Vilas Capital Management.
“They’re losing a lot of money,” Thompson said. “They have $10 billion in debt, and their balance sheet looks terrible.”
Thompson is currently shorting Tesla stock, which means he profits when share prices decline. The Tesla position is the second-biggest holding in the Chicago-based fund, which has $25 million in assets under management.
Tesla is ramping up production of its Model 3, a more mass-market vehicle than it has previously produced. Problems at the Fremont, Calif., assembly plant have kept output well below the goal of 5,000 cars a week.
“The Model 3 was sort of the promised land and in my opinion, it is sort of failing and I don’t think it will ever be profitable – materially profitable,” he said.
Thompson said Tesla skipped a lot of the testing and quality control for the Model 3 that other car companies use and it has created a "nightmare scenario" when trying to ramp up production on the car.
He believes the lack of knowledge about the car business is hurting the company's effort to make and sell cars at a profit.
Thompson said recent downgrades to Tesla’s debt rating show he’s not alone in his concerns over the company’s health.
“The company has said many, many times — six, eight, 10 times in the past — profitability is just right around the corner, … and it never appears,” Thompson said.”
He sketched out a scenario where parts suppliers, spooked by Tesla’s deteriorating financial position, start demanding payments upfront and push the company into bankruptcy.
“That is a death knell to a company such as Tesla,” Thompson said. “You’ll start getting the supplier base asking for cash prior to delivery, and they don’t have the cash to be able to do that.”
In 2014, Nevada lawmakers provided Tesla $1.2 billion in tax breaks in exchange for building the Gigafactory at the Tahoe Reno Industrial Center in Storey County, about 10 miles east of Reno.
Thompson believes states that offer tax credits like the one supplied to Tesla are being "taken for a ride."
"Every time a state says, 'Boy, San Francisco is doing great. If we could just have some of that we would be doing much better.' It just never seems to work," he said.
He believes Nevada needs to play to its strengths of gambling and hospitality.
John Thompson, Vilas Capital Management founder and Tesla bear