Tesla Won't Be Able To Paper Over Losses in 3Q: Gordon Johnson

today's trading after earnings came out yesterday. Let's bring in somebody who says, maybe Tesla's, you know, just a little bit um not cooking the books. But well, we'll let him, We'll let him say it. Gordon Johnson is founder and CEO of g LJ Research. So Gordon, did Tesla or did Tesla not make a good profit? Uh? Put it this way, Um, if you look at their core auto segment,

Tesla losses significant amount of money. So what Tesla does is every quarter they recognize a certain level of regulatory credits and these net income revenue that don't have cash tied to them. Um uh. And this quarter that number was million. Their net income that they reported was one oh four. So those credits, um. They lost a significant amount of money, and the CEO even said this on

the call. He said, our business is not based on the assumption of continued credit recognition because these are temporary numbers. But what's key here is if you look over the past twenty six quarters um and only four of those quarters, if you take Testla's net income less regulatory credit sold has they have They posted a profit, the most recent

of which was three to nineteen. But what's also interesting is their regulatory credit revenue jumped from about a hundred million Q four to three hundred four and Q one

and four hundred eight million and Q two. The reason that significant is because that allowed them to report four straight quarters of profit, which basically allows them or makes them as eligible to be including in the SMC five hundred real quick what What's what's important here is they're effectively recognizing revenue on credit sells they have not yet made to uh FIAT Chrysler. The Chrysler said they're gonna buy credits essentially from Tesla at one point one billion

over the next four years. In the first two quarters of this year alone, Tesla has recognized we believe eight hundred million of that one point one billion, So you can see they're significantly pulling forward revenues if they really haven't even sold yet to post the profits. We think it's not real. We think it's uh, you know, it's artificial, and we think they're gonna go back into severe losses in the back half of this year. So Gordon, why

does the market not care about that? The stock is up two percent year to date, up over five on a trailing twelve month basis um, Why does a market not care? Well, Tesla is completely detached from reality. But if we have to put it on one thing, we put it on this Tesla stock in March essentially to get February. March fell from nine hundred and fifty dollars and three hundred and fifty dollars when the market collapsed, right, and then in late March the key that the federators

serve announced Qui infinity. They essentially grew their balance sheet by three trillion dollars over a course of nine weeks, which is a four years worth of tax revenues in the US. The questions why are we even paying taxes? Right? That money is just going into stock market, and every speculative stock went to the moon. That's essentially the key reason why we'd say, um uh, people don't care, but

we think they're gonna be forced to care. Because Tesla reiterated it's it's guidance for five hundred thousand cars sold. So in three two they're gonna have to sell roughly a hundred and sixty thousand cars. We think they're gonna fall far short of that. We think they're gonna report a big loss in Q three. They guided, Tesla has guided.

Nobody's even talked about this on the South side, but Tesla guided on their call last night, they said, our credit cells this year are gonna be double last year. So if you take last year multiplied by two, subtract the first half of this year, they're guiding their credit cells down rough and the second half of this year that's a hundred percent gross margin revenue, it's gonna fall.

So it's clear to us we believe right. Our opinion is they effectively pulled in a bunch of credit revenue to show profit to be including the SMP by hundreds, and they're gonna go back to significant losses next quarter. So given where the valuation is, not only do they need to show tremendous growth, which we don't think they're gonna do. Um. Their revenue is essentially peaked in the

fourth quarter of eighteen UM and so did their deliveries. UM. But we also think they're gonna go show severe head income losses and cash burn. We think that's gonna push the stock down. But all of the analysts conceive that test Us sold almost eight hundre million dollars in regulatory credits. Right, They're not hiding it or anything. So why are analysts even not there is anymore? Well, I'll give you this, right, the consensus estimate going into last night's earnings was a

loss of a dollar twenty Right. If Tesla would have lost money, that would have basically ended their ability to be included in the SMP five hundreds since must basically there was an email he sent out to his employees that was leaked to the um UH to the two news wires that they're close to propitibility. The stock has been on fire. If the street estimate, like, if analysts really thought they were gonna lose money yesterday, they should have downgraded the stock to cell because the stock would

have imploded. I think they're select analysts that are complicit um, and and and and and essentially the pumps that are what Tesla consistently see. Um. What I mean by that is like the Street estimate for deliveries with seventy before the end of the before they even reported the deliveries, Tesla came out themselves effectively be another league and so we're gonna do you know, we're gonna be close to

close to ninety thousand. So I think the Street and argue, this is our opinion some analysts are intentionally keeping keeping their numbers low in order to keep the barlow so Tesla can step over it. All. Right, let's step away just a second from Tesla and the quarterly earnings. What is your call as to how the other big auto manufacturers will step up? When they will step up in

the EV market? Right, So, if you look at Tesla's revenue in Europe, um their market share rather, it's fell from to roughly from four Q two I'm sorry, from lun Q of last year to today. If you look at their market share in the most important global EV market, which is Norway. And why do we say that because Norway is subsidized of the cost of your electric car. So everybody who makes electric electric car sells in Norway. Tesla shares down from thirty seven percent in the fourth

quarter to roughly five percent as of today. The point is just this year e the EU put in a rule that you had to basically sell a certain amount of electric car that a carmaker or you penalized. That wasn't the case last year. So in the markets where Tesla is facing competition now they're getting uh, they're losing in a big way. The other thing I will not it is a lot of people say, well tech Tesla is the technology leader, right, they lead in batteries and

they lead in autonomous driving. Let me let me put some reality today. Tesla does not make batteries, right, They do not make batteries. They buy them from Panasonic and c A t O. Anybody can buy a loop AMN on batteries from those vendors. And Tesla's R and D right if they're gonna take over the battery space. Their R and D spin was down almost six in Q two year over year, um, so they're not spending on R and D and they five batteries from other people.

So we think there's misconceptions. And then lastly, in full self drive navigant rank the Dead Last dead lest Gordon Johnson, thanks so much for joining us. A compelling bear case for what has been a rocket ship of a stock. We'll see how it plays out, certainly. You know, no sector has been hit harder arguably than the US airline business. They sold. The traffic just plummet with the pandemic, and it really hasn't rebounded that much, putting a lot of

pressure on their balance sheets. UH, and they are coming to market left, right and center, trying to raise capital, mortgaging everything they can effectively. American Airlines is in the market right now. Let's talk about that deal. Molly Smith, corporate finance reporter for Bloomberg News. Molly, thanks so much for joining us here. Tell us about this one point two billion dollar financing that American is bringing the market. Yeah, so we're probably going to see at sometime at this quarter.

American told us this morning when they reported earnings, and the idea is basically to mortgage the brand in uh, putting together a collateral package for this one point billion dollars debt financing that Goldman is going to be working with American on so that some of that collateral includes the American Airlines trademark, also the a A dot com website domain, as well as key airline plots at LaGuardia

and Reagan National Airports. So it's really interesting on the I P side, at least, we haven't seen airlines yet putting up their trademark as collateral, so really shows you how they're really dolling out the kitchens things to get some of the secured financing. Yeah, how if you were a Goldman and you needed to would you sort of

cash that in? So it's a it's a bit reminiscent for me, at least of when Ford had to do something similar to put pretty much all of its assets in hock to avoid filing for bankruptcy back in two thousands five, and including for Fords the blue oval logo at the time. So it's, uh, it's something that's not you know, unique to companies in general, but definitely have not seen this from the airline so far in putting together these collateral packages. Boy, here's a young corporate finance

bankers the Chase Manhattan Bank. I could not even imagine going to my credit committee saying, you know, we lend one point two billion dollars against basically a logo. Um, but let's see if goldben can get it done. So, Molly, give us a sense of the cash burn for this industry. You know, I just reported a story in the last hour of Bloomberg News, reported a story about, you know, how the airlines are adding fewer than the expected flights here because the pandemic is kind of surging in in

in key states. Here. What's the cash burn like for a lot of these companies right now? It's improving, but still negative. So I think they would take that as a general positive, and it seems that that's what investors are taking as a positive as well, that at least for American the cashman was nearly a hundred million dollars in April, pretty much a third of that in June. So again still negative, but improving. And we saw that

also with Southwest and United. So they are attributing that, of course to you know, some increased revenue and that it does seem that passengers are more willing to fly. But of course, uh, there's still a long way to go in terms of coming back from this travel shutdown. It seems a little odd. So United putting up its loyalty points as collateral. You know American now putting up basically, I suppose that its logo, why go to the trouble of all of this, Why not just give them some

cash to tie them over? If you're going to back them, why not back them? I think, you know, there needs to be some kind of security in these deals, and that of course, if any of these companies could borrow through the unsecured market at a reasonable cost, they would probably consider that. But if you're already looking at double digit yields on secured financing, then you can only imagine how much more painful or possibly not even it doesn't even seem possible to do it in the unsecured market.

So and we've seen that investors are definitely assigning more weight to collateral too. I mean, remember United had try to previously secure a bond sale with some of its old aircraft, and investors were thinking that by the time these debts the debt matures, that a lot of those aircraft wouldn't even be in flight, so they then turned to the frequent flyer mile program. So it definitely is looking like the brands are getting more creative in terms

of what they're putting up. So Molly, how's the market for some of these? I would call them quasi esoteric kind of credit facilities. Here are bond deals you have to pay a huge premium to get money based upon

you know, with lateral clatteral being your logo. Yes, So we've seen a lot of other industries to like cruise lines um it's another big one that have also been very creative and some of these secured financings of believe it was Norwegian Cruise Line that cut up some of its islands believe it or not to borrow against and still paid um a ten percent plus fields in that deal. Uh. Carnival has also done some similar financings backed by its ships. So we definitely see that there is a price to play.

But it seems like the idea on the investors side is that these companies are going to be around and come three five years whenever this debt matures, and that's why they're willing to lend. I mean, I can see the slots being worth something, but has it ever happened before that, For example, a new you know, an entity goes bust it it didn't make good on its in you know, and its promise to sort of pawn back. Basically it's logo, and then some other entity arrives twenty

years later and takes the name or something. I mean, it could could have happened, Molly. I guess theoretically it's possible, suere though, I would think that whenever you are putting up these kinds of assets of collaterals, that there's a huge bedding process to make sure that the appraisal value is there and that it is something we should admit to borrow against. Yeah, it's so fascinating. It's a great story, Molly.

I hope everybody listening to us reads it. Molly Smith's an American air borrows against Brandon one point two billion dollar Goldman deal. Let's take a look at the equity market, shall we. We had that, Let's just put it into context. We came into this pandemic, markets traded off about thirty four thirty five percent. We since retraced about that just extraordinary bounce back. The question is, as we head into and experience the second quarter earnings, where do we go

from here? Tell us answer that we welcome Phil Orlando, chief equity market strategist ahead of client portfolio management at Federated Hermes. Uh, they are in uh sixty two sixty eight billion dollars in equities under management. Phil, thanks much for joining us once again. Here we're in I guess the second week of earnings here. Any takeaways you've had so far, the major takeaway is how much better the

earnings have come out versus what we were expecting. So consensus going in was that earnings would be down about forty five year over year, UH, and that uh, you know or so of companies would would be withholding guidance. Now we're only about you know, fifteen or twenty of the way into the season, so it's still early. But the companies that have reported, three quarters of them uh beaten consensus earnings by about four which is the strongest beat we've seen in in ten years. So again, uh,

there's still plenty of track left. But at least the companies that have reported early uh seem to be doing a lot better than than we had thought. How correct quote unquote our valuations right now? Pheel. There's a little talk in recent days about the you know, the top five companies in the SP five accounting for a fifth of the index. But if you actually look into it.

Many of these companies you know have sold off. So there's no question that technology has been an important driver of UH this fifty percent rally we've seen from the

bottom of the market on March twenty three. And there's no question that within technology, the fang stocks Facebook, Apple, Amazon, Netflix, Google, I'll throw Microsoft into that mix have have done heavy lifting in terms of technology UM and and this is a question that clients are asking a lot are in stocks expensive and on the basis of the reduction and earnings that we've put in place for this year UH

SMP earrings last year or hiring sixty seven dollars. We initially had a hundred and eighty dollar estimate for this year at the beginning of the year, and then the pandemic hit. So we've taken our estimate down from a hundred and eighty dollars this year down a hundred and twenty five dollars. So on the basis of where stocks are now, on the basis of a HUD and earnings, you're trading at about twenty six times earnings, which which

is very high by by any measure. But the point of issue that a lot of people don't understand is that because you're in the depth of the recession, and this, you know, the second quarter, this is the long the deepest recession we've seen in a really long time, it's inappropriate to value stocks off of the trough of the recession. You've got to look out to when you're gonna see some normalization in the economy, and in our mind that

that's calendar twenty two. It will take us that long to get back to about a hundred and seventy five dollars in earnings. So if you're looking at today's stock prices on the basis of you know, normal earnings quote unquote in calendar twenty two, that you're looking at about an a team multiple, which is perfectly fine given the fact that treasury yields here at sixty basis points and the core PC inflation indicators at one. So it's really

a function of your focus and your time horizon. Alright, Phil, So more near term here, I guess we're starting to hear a lot of conversation coming out of Washington, d C. We're getting to the short strokes here of potential fourth round of fiscal stimulus. How key is it that the stimulus package be, you know, as robust as maybe investors really hope for. Well. I think it's critically important that

there is a package. I think it's important that it be done in a timely fashion, which is to suggest the window between this past Monday, when Congress returned from vacation, UH to August tenth, when Congress goes back on vacation. We've got to have a package in that window. We can't have Congress go on vacation and not get anything done. Now, the question is what's the size of the package, and

what are the details going to be? And and Speaker Pelosi and the Democrats in the House have talked about something in the three trillion dollar neighborhood. I think the Republicans in the Senate have talked about something in the neighborhood and half that size. I'm less concerned about the size that I am. In terms of the components. I think we need to make sure that uh that there's

more more money for hospitals and labs and testing. We've got to make sure that that cities and states are taken care of in terms of maintaining their their near term payrolls. We've got to make sure that businesses are taken care of. We've got to make sure that there's some liability protection for companies that have done the right thing in terms of keeping their customers and their employees safe. And we've got to get some money into the hands

of of individuals. The sticking point up until now, and I don't know. I'm not in the room, so I don't know what the discussions are is how do we shift the incentivization from from staying home and and getting money as opposed to going back to work if your environment is safe and getting back on the payroll. And I think that that that six dollar extended unemployment bonus which is set to expire at the end of this month,

that seems to be the key discussion point that's going on. Well, that's a long list of things that need to be in this package, and they have a week to do it, so I hope that some of them do actually materialize. Our thanks as always to fill Orlando for joining us from Federated Hermes Investors. It is time to check in with Bloomberg Opinion. Today we are looking at and Taylor's

parent going bankrupt. Retailer's collapse has the potential to create more devastating ribble effects than were called by other COVID related watchouts that preceded it. According to Bloomberg Opinions, Sarah Holzac who joins US now Sarah, why is and Taylor and its parent more of a systemically important retailer or a group of retailers than, for example, a J. C.

Penney or a Brooks Brothers or a J. Crew. Yeah, So as Tina is this quiet giant, and not in terms of sales, but in terms of how ubiquitous it is in US shopping center. So it has twenty hundred doors. Compare that to four hundred fifty stores for J. Crew or two hundred fifty stores for Brooks Brothers or eight hundred forty stores for J. C. Penney. It's just massive, And so all kinds of mall reefs have a lot

of exposure to this company. Uh. It is the second largest tenant for Tanger Factory outlet centers, It's a top ten tenant for Brookfield and Acadia, and It's Simond property is a huge mall operator. Only Gap and L Brands are larger tenants than a Sena. So a Sena, I haven't eve heard about it until I read your column, Sarah, so full disclosure. So I learned a lot reading your column here. Uh. And how big they are in the world of retailing? How are they overall? How's their balance sheet?

Has their capital structure? Is there a real risk here for these malls from this big group here? Yeah, so their balance sheet is not in great shape and that's been true since before COVID. Uh. This is a company that took on a significant amount of debt in when it bought an Taylor and Law and because of the business has been so unhealthy since then. It just hasn't been able to make much progress in bringing down that debt. So that was a key factor here and having to

resort to bankruptcy. And it's just a company that's been really out of touch with consumer taste already. In the last couple of years, had to wind down its dress Barn chain, which was another huge chain with hundreds and hundreds of locations and it's sold it's more resist chain because again, it just couldn't find a way to generate consistently strong, comparable sales growth at these concepts because it was having so many fashion misses on Taylor and Taylor

Loves Lane. Brian Lewin Gray, on and on and on. Will anybody miss these? Is there a moat at all that it was protecting or can somebody else just do the job of on Taylor at l Yeah, so it's certainly in this time where we're all working from home in our sweatpants, I think. And Taylor's customer that was, you know, mostly looking for office clothing. Um that that might be a business that you know, there's not a

lot of demand for for quite some time. But it struggles with the Lane Bryant and Catherine's chains have been particularly baffling for me, and I do think there's opportunities for competitors to step in there. Both of those chains catered to plus sized women and that's a remarkably underserved portion of the US apparel market, and so I think if there's lots of closures there, that's a really good opportunity for department stores are specialty apparel target to step

in and serve that audience. Sir, With all the trouble with the bricks and mortar retail, which you cover so well, what does it mean for the traditional American shopping mall. I think it means it's in a lot of trouble um, you know, the the store closures. When we look out over the next five years, I expect we'll see the most store closures in the clothing and accessories category. Some estimates have said we're going to see twenty four thousand

store closures in that category. By compare that to only say twelve th store closures in consumer electronics or eleven thousand store closures and grocery. And as we all know, clothing is the heartbeat of the American mall, right, That's what most of the tenants are, that's what the store

mixes then for quite some time. So as we continue to see struggles for clothing stores amid COVID, I think that really spells a lot of trouble to the American mall, which has been so much trouble already before this crisis. I mean, you don't have to pay rent on Instagram, right, The advertising is probably a lot lower on Instagram. And

I'm not even being funny. I mean the amount of ads that I'm receiving for clothing and for discounts obviously now because clothing retailers are just not selling is do I mean, it would make you not want to open Instagram these days, Sarah, what happens to these malls? I mean, have you heard of of any sort of new idea that the that that that will make these malls work again?

I mean, obviously there will be huge efforts to try and sanitize and and so on, but I mean, until after the the vaccine, does anybody want to be in a mall? I don't think so. And look, I think that the strategy that malls had been resorting to before COVID was to bring in alternative tenants like restaurants and gym's, because those are the things that were actually generating foot traffic.

And I think those tendants are are going to struggle even more to draw foot traffic in COVID era, given you know, the health concerns related to heavy breathing and sweating in close proximity with other people at a gym, for example. So I think malls are in a really tough spot right now. I think, you know, the best they can hope for is to you know, really enforce social distancing guidelines, try to make it easy for stores

to use their parking lots for curbside pickup. Um. I guess really emerging as a popular way to get product right now, and you know they're going to kind of have to muddle through that way. It's a really difficult situation. Yes, sorry, and and Vanni. Yesterday I drove into New York City for the first time since March, and I was just shocked by the number of empty stores, uh stores for rent um. It just seems like an every single block there are multiple empty storefronts. Just in the space of

four months. It's just been devastating here in New York. I mean maybe even taken up our inventory and and and and still are the past one the other day where there was inventory and it last weekend, there was none this week. Yeah, it's it's just extraordinary. So, Sarah, my guess is this is just accelerating the demise of bricks and mortar and the rise of e commerce. Yes, exactly. A lot of these retailers are seeing unprecedented e commerce growth.

You know, Target said on an average day in April it was getting as many e commerce orders as it gets on Cyber Monday. Right, this is just completely um change the contours of their business. And so I will think, I do think will continue to see stores trying to retailers trying to use those physical stores as fulfillment centers for online orders at least in the meantime time. But of course that's not a practical solution over the long term, right you don't need to be paying fifth avenue rent

uh to mail clothing to your shoppers. And so there's just going to have to be a dramatic rethinking of the store portfolios as LEAs has come up UM and I think that's going to take time, but it's definitely going to happen. I did see that certain leases have been taken over, and one that jumped out was Aritzia, that Spanish retailer, and I just wondered what retailer is

to I mean, how much money do you have? How much cash do you have to have on your books to decide to sort of a new release right now. I'm not sure there's one magic number, but I think you just have to feel confident that you are going to be able to whether this crisis, and I think you have to think about where you are in your

store closure or opening journey. Right There are a lot of retailers who you know, younger changed, like a the No Boast for example, UM that their store portfolio isn't littered with all these uh, you know store locations they picked out in N five. They don't make sense anymore right um, So for them opening stores in its targeted way still makes sense right now, and they're likely to be able to get cheap rents and take advantage of that.

If you're Maze, you've probably got a lot of old stores in your portfolio that don't make sense for this environment, and you're certainly not looking to lease anymore right now. Hey, Sarah, thanks so much for joining us. Once again. We always appreciate your thoughts on the retail space. Sarah Halzack retail columns for Bloomberg Opinion. You can read all her work in that of Bloomberg Opinion, Bloomberg dot Com, Slash Opinion, or Opie I n go on the terminal. Thanks for

listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever a podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn and on Paul Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio