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David Einhorn: Tesla is using drivers as 'guinea pigs'

David Einhorn, founder and president of Greenlight Capital REUTERS/Brendan McDermid

Hedge fund manager David Einhorn, the CEO of Greenlight Capital, slammed Tesla (TSLA) claiming that the electric car company uses its customers and motorists as "guinea pigs."

In a letter to investors on Friday, Einhorn writes that the "the wheels are falling off" at Tesla and in some cases "literally." The Tesla short-seller went on to detail a laundry list of safety concerns and then questioned why there hasn't been a recall of the electric carmaker's vehicles.

"We recall the public concern when a handful of Samsung Galaxy phones spontaneously combusted in 2016,” Einhorn wrote. “By way of comparison, a few people suffered burns, and there were no fatalities. Nevertheless, this led to a recall of millions of phones and a variety of new safety rules. When Uber had a single fatality in its self-driving program in 2018, it suspended the program for nine months only to resume it with enhanced safety protocols. Recently, GM, Ford and Toyota announced a consortium to establish safety rules for development, testing and deployment of autonomous vehicles. TSLA was notably absent from that group and continues to use its customers and other motorists, bikers and pedestrians sharing the roads with distracted or sleeping Tesla drivers as guinea pigs.”

Einhorn's bearish case focuses on slowing demand for Tesla's cars. He argues that the Tesla enthusiasts have already had their demand satisfied and Tesla's "poor reputation for quality and service and diminishing tax incentives" may limit interest from a broader customer base. This comes as competitors ramp up their electric vehicle offerings, to which Tesla has responded to with price cuts "that have only generated minimal incremental demand."

"All told, even with the price cuts, TSLA only sold 63,000 cars in the first quarter – a quarter in which it benefitted from the introduction of the Model 3 into China and Europe and of lower-priced variants in the United States,” he said. “Product introductions generate a surge of demand from enthusiasts, just as a new oil well starts with flush production. After the initial surge, demand deteriorates. American surge demand for the Model 3 happened in 2018 and European and Chinese surge demand was mostly satisfied in the first quarter of 2019.”

He notes that Tesla's guidance for quarterly demand is about 100,000 to 115,000 this year.

"We don’t see what can possibly drive that much demand. In fact, we suspect that without initial surge demand elsewhere, TSLA will struggle to even maintain first quarter unit volumes."

Einhorn argued that this a company that appears to be "on the brink" right now, citing the slowed demand, "desperate" price cutting, cutting capex, closing service centers, layoffs, senior executive exits, etc.

"Last summer, Musk promised TSLA would be profitable and cash flow positive in every quarter going forward. He repeated that forecast as recently as the end of January. That promise has failed to materialize. The question at hand is: in a few months will Musk be again bragging that he saved the company from the brink of failure, or will TSLA in fact fail this time? Come back at the same Bat-Time on the same Bat-Channel next quarter to get an update."

Greenlight Capital gained 11% during the first quarter. The Tesla short was a "significant" contributor to that performance with the stock falling from $332.80 to $279.86 during the quarter.
