David Einhorn Says Tesla Resembles Lehman

(Bloomberg) -- David Einhorn, a prominent critic of Tesla Inc., bashed the electric-car maker, saying its woes resemble those of Lehman Brothers Holdings Inc. before the bank failed.

“Like Lehman, we think the deception is about to catch up to TSLA,” Greenlight Capital said in a quarterly letter Friday seen by Bloomberg. “Elon Musk’s erratic behavior suggests that he sees it the same way.”

Einhorn, who rose to prominence with his wager against Lehman, pointed to parallels by saying the bank “threatened short sellers, refused to raise capital (it even bought back stock), and management publicly suggested it would go private” in the months leading up to its collapse.

The Greenlight letter argues that Musk thought he could lower the cost of producing the Tesla Model 3 -- long billed with a starting price of $35,000 -- by cutting manufacturing expenses and automating its factories.

But he said Tesla’s costs ended up exceeding expectations, leading the company to charge much higher prices. This predicament, Einhorn believes, has been the source of the Tesla CEO’s “erratic behavior.” Customers are unhappy because the car is more expensive than what Musk promoted when taking their deposits, Einhorn said.

“He can’t make the car without losing too much money and he can’t bring himself to cancel the program and refund everyone’s deposits,” Einhorn wrote.

With production, 1st you need achieve target rate & then smooth out flow to achieve target cost. Shipping min cost Model 3 right away wd cause Tesla to lose money & die. Need 3 to 6 months after 5k/wk to ship $35k Tesla & live.

— Elon Musk (@elonmusk) May 21, 2018

The upshot: Musk is trying to get himself fired, Einhorn said. “Quitting isn’t an option because it prevents Mr. Musk from claiming he could have fixed the problem if he stayed.”

Short sellers like Einhorn have been a long-running target of Musk’s ire, and the feud continued on Thursday after he mocked the U.S. Securities Exchange Commission as the “Shortseller Enrichment Commission.” The CEO sent the tweet just days after settling a fraud lawsuit with the agency over his questionable tweets claiming to have the funding and investor support secured to take Tesla private.

Musk and a Tesla representative didn’t respond to a request for comment. The CEO has insisted that the company won’t need to raise capital, citing his expectation that higher output of Model 3 sedans will generate profit and positive cash flow in the third and fourth quarters.

In his letter Friday, Einhorn said his short position on Tesla was his second-biggest winner in the third quarter.

But this year is shaping up to be Greenlight’s worst ever. Its main fund has lost 26 percent through September.

As critical as Musk has been of shorts, he and Einhorn have engaged in some playful banter recently. After the hedge fund manager wrote in a letter to clients months ago that he was happy that his lease on a Tesla had ended, citing problems with its touch screen and power windows, Musk responded on Twitter.

Tragic. Will send Einhorn a box of short shorts to comfort him through this difficult time.

— Elon Musk (@elonmusk) August 1, 2018

Einhorn said in his letter that after a two-day offsite review of the firm’s positions last month, he and his team think they have a “deep understanding" of their portfolio. Some changes were made, but Greenlight is mostly sticking with their ideas.

“Most of our company theses are intact,” the letter said.

Outlining his firm’s other holdings, Einhorn said the firm exited Apple Inc. in the third quarter at $228 a share after first buying it in 2010. It made more than $1 billion on its position, the letter said.

Einhorn said Greenlight’s efforts helped move Apple to aggressively repurchase stock, driving up earnings-per-share. But the manager sold his position, saying the company’s valuation is now less enticing and he has concerns about the U.S. trade war with China, where iPhones are assembled.

The firm is “somewhat worried about Chinese retaliation against America’s trade policies,” the letter said.

Other highlights from the letter:

The biggest winner during the quarter was Brighthouse Financial Inc., which announced a share buyback during the quarter.Greenlight added a position in Altice USA Inc., which should benefit from rebuilding its network with fiber in the next few years.The firm exited Micron Technology Inc. when his team sensed that DRAM prices could fall.Regulatory risks around social media companies caused the hedge fund to exit its stake in Twitter Inc. after a 78 percent gain in eight months.Greenlight’s largest disclosed long positions at the end of the third quarter were AerCap Holdings NV, Brighthouse, General Motors Co., Green Brick Partners Inc. and gold.

For more on Tesla, check out the Decrypted podcast:

(Adds Einhorn’s views on Tesla starting in sixth paragraph.)

--With assistance from Joshua Fineman.

To contact the reporter on this story: Simone Foxman in New York at sfoxman4@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella, Josh Friedman

©2018 Bloomberg L.P.