A hedge fund run by billionaire David Einhorn alleged Tesla is putting 'inadequately tested and dangerous products on the road'

REUTERS/Danny Moloshok

Elon Musk.

• David Einhorn's Greenlight Capital told clients that Tesla's stock should be performing much worse than it is.
• That's according to an October 24 client letter reviewed by Business Insider.
• "Tesla had an awful quarter both in its current results and future prospects," falling 6%, Greenlight wrote. "We believe it deserved much worse."
• Greenlight threw water on Tesla's driverless car plans, saying "autonomous driving may more likely reflect TSLA's willingness to put inadequately tested and dangerous products on the road rather than a true technological advantage."

David Einhorn's Greenlight Capital told clients that Tesla's stock should be performing much worse than it is.

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"Tesla (TSLA) had an awful quarter both in its current results and future prospects," Greenlight, a $7 billion hedge fund, wrote to clients in an October 24 letter reviewed by Business Insider. "In response, its shares fell almost 6%. We believe it deserved much worse."

Greenlight added: "So much went wrong for TSLA in the quarter that it is hard to only provide a brief summary."

Tesla's stock price, which Greenlight is short, has confounded Einhorn in the past. "Tesla is no Apple," Greenlight told clients in July.

Here are the issues Greenlight highlighted in its October letter:

• "Poor demand for its legacy vehicles and manufacturing challenges for the new Model 3. Notably, TSLA dramatically reduced its gross margin assumption for the September quarter and publicly blamed ramp-up costs for the new Model 3 sedan."
• "More quietly, the company used the lower gross margin hurdle to offer incentives and to lower the cost of options on the Model S and Model X vehicles, and even offered significant markdowns on showroom models. Given the depth of the price cuts, we were surprised that demand for the Model S and Model X only improved modestly."

Greenlight also took issue with Musk's leadership. "While the CEO makes bold claims about TSLA's superior prowess, continued production shortfalls, defects and product recalls disprove him," Greenlight wrote.

Specifically, Greenlight said that Tesla faces competition from established original equipment manufacturers -manufacturers that resell another company's product under a different brand name. Such companies " have decades of scale manufacturing experience," Greenlight said.

Greenlight also threw water on Tesla's driverless car plans, writing: "Some of TSLA's presumed market lead in areas like autonomous driving may more likely reflect TSLA's willingness to put inadequately tested and dangerous products on the road rather than a true technological advantage."

Business Insider has reached out to Tesla and will update this story when we hear back.

Greenlight's funds gained 6.2% after fees in the third quarter, bringing its year-to-date return to 3.3%, the letter said.

The firm managed $7 billion in hedge fund assets as of mid-year 2017, according to the Absolute Return Billion Dollar Club ranking.

You can read more about Greenlight's letter here.

Get the latest Tesla stock price here.