Published on February 10th, 2019 | by Zachary Shahan
February 10th, 2019 by Zachary Shahan
A year ago, Jim Chanos was a prominent supposed “expert” on the topic of Tesla [TSLA]. I’ll start out by saying that I’m giving Chanos the benefit of the doubt in this piece and not assuming any nefarious motives. Though, I will quickly summarize a popular theory that disagrees with that assumption, an explanation as to why he has been so publicly negative about Tesla over the years. Also, while I’m not assuming this theory is correct in this article, I definitely think the theory could be true. But before getting to that, there are a few more items for the intro.
Chanos’s big claim to fame is that he was short selling Enron and predicted its collapse before it filed for bankruptcy in 2001. As a result, certain people have treated Chanos as something like a sage of the investment world. However, an old phrase comes to mind when I think of Chanos — “if all you have is a hammer, everything looks like a nail.” It seems Chanos and a group of fellow short sellers are obsessively looking out for “failing” companies everywhere they go, and often finding companies that aren’t actually failing at all, companies that are simply investing in the future, pumping money into growth in order to dominate large markets.
I have never found Chanos’s arguments regarding Tesla particularly convincing. They generally came across as the arguments of someone who had 90% of the puzzle put together, mostly incorrectly, and was trying to ignore the other 10% to pretend they had finished the puzzle and there weren’t any mistakes. At the core, it has seemed that Chanos hasn’t understood Tesla’s products or its potential and has been coming to his conclusions about the company by peering at spreadsheets and missing the real-world context.
The alternative theory, which considers Chanos much less innocent than that, is that he identifies companies that rely on regular financing for a portion of their business model, then makes a big public fuss about those companies being on the verge of bankruptcy (thus helping to kill or fatally weaken their chances of getting the finances they need to keep rolling), shorts the companies all the way through, and then cashes in massively when the market (which normally wouldn’t have done so) abandons the companies and they have to file for bankruptcy.
In the case of Tesla, clearly, the company needed a good bit of financing for a few years to get its massive manufacturing and operations up to a significant scale and to get the Model 3 to market in high volume. With a bit of bad luck (or good luck in the case of Chanos), Tesla could have run out of money before getting to a high production level and could have then collapsed. If stumbling, even a bit of a nudge from an influential player could have forced the collapse. However, what basically happened is Tesla achieved what it set out to achieve, started mass producing the Model 3, started making profits, and got back to a healthy, strong running pace — far beyond the stumbles. That wasn’t good for Chanos’s proclamations that Tesla was approaching a flaming death.
It appears that Chanos has been short Tesla [TSLA] since the stock price was around $200, since he said in a June 2017 interview (when the stock price was around $350) that he had already been short the company for 150 points of the stock price’s rise.
Chanos was frequently on TV and being interviewed in other press while Tesla was stumbling in the second half of 2017 and first half of 2018, but it seems he has nearly disappeared on the topic of Tesla since Tesla started turning quarterly profits. Hmm, odd. He didn’t feel a need to correct his false presumptions and forecasts?
In any case, all of that’s just the intro for this Tesla (short seller) flashback. The whole piece came thanks to one thoughtful reader who suggested (in November) that it would be interesting to go back through Chanos’s previous opinions on Tesla and pull them together for some useful context going forward. Although major media outlets that were frequently taking and magnifying his advice on Tesla a year ago aren’t doing this, I figured some of their readers and viewers would appreciate it. Ours certainly will.
The first quote is one the reader sent along. In June 2017, a Bloomberg TV host asked, “What would have to happen for you to throw in the towel and say I give up on this short, this is not going to work?” His response: “I think I’d have to see the company begin to make money selling products.”
Tesla made profits in the last two quarters of 2018. It appears Chanos still isn’t throwing in the towel. We’ll come back to that at the end of this article.
In September of 2017, Chanos implied Tesla would never make a profit. “Three years ago, this company was supposed to be making money now. Now it’s supposed to be making money by 2020. And I’m guessing by 2019, we’ll probably be hearing 2025.” Chanos called Tesla “structurally unprofitable” in that interview.
First of all, it should be remembered that Tesla’s plans changed a bit when it pulled in a jaw-dropping number of reservations for the Model 3 — over 100,000 reservations before the car was even shown. At that point, Tesla ramped up its production plans for the Model 3 and invested more money into faster growth, which came at the expense of short-term profits.
As far as a perpetual delay in profits, we now know that Chanos’s hypothesis was nonsense. It’s 2019 and Tesla just reported two quarters of profits — even before shipping the Model 3 overseas or offering leasing on the Model 3.
In April of 2018, Chanos claimed that Tesla CEO Elon Musk “may be misleading investors.” He also saw Tesla executives moving onto new jobs as a bad omen. “The No. 1 sign of impending problems is mass executive departures,” Chanos said. “This is becoming a torrent at Tesla. … [It is] stunning the accelerating rate of executive departures.”
It actually wasn’t a torrent, or even anything notable, as our friend Galileo pointed out after actually crunching some numbers and comparing Tesla to other companies.
To top things off, Chanos predicted Musk would leave his Tesla CEO role and spend more time at SpaceX.
None of those claims seemed to have any substance behind them, but CNBC and others kept inviting Chanos to provide his “expert opinion” nonetheless.
In May of 2018, basically every analyst covering Tesla was saying the company couldn’t get through 2018 without raising more financing, yet Musk was saying Tesla absolutely didn’t need to raise more money. On a quarterly conference call for analysts and shareholders, Musk got fed up with some analysts asking the same questions over and over and ignoring Tesla’s previous statements and Musk’s previous responses. Depending on how you read things, that went down as either an epic or disastrous shareholder conference call. Jim Chanos’s opinion was as such: “Don’t let Musk’s conference call theatrics fool you. He did not want investors to focus on his rapidly deteriorating finances.”
It turned out Tesla didn’t need to raise any more money in 2018 — basically all of the analysts were wrong — and Tesla ended 2018 with two profitable quarters. While it may well have been a difficult time for Tesla — the end of “production hell” — the fact is that, as Musk predicted and tried to state clearly several times, Tesla soon turned a corner and started pulling in more cash than it needed to spend.
Strike two for Chanos.
In July of 2018, Chanos complained, “What bothers me is … the willingness to say things that I think he knows are a stretch, to be polite.”
There are various ways to read Elon Musk. He is an optimist, by nature, which he has admitted many times. Sometimes he expects things to be easier and quicker than they are. Some people, like Chanos, appear to view that optimism as deceit/lying. I don’t think that’s what it is, but this topic is too fuzzy to score.
In the end, though, one of the things that I think makes Musk special is his superb ability to execute. Combining that with his willingness to dream big for the benefit of humanity has led to tremendous corporate successes.
Oh, also, July is the first month of the third quarter, and Tesla did indeed show a profit in the third quarter after Tesla short sellers like Chanos laughed at the idea.
In August of 2018, Chanos proclaimed that the high short position in Tesla was “the best thing the stock has going for it. ‘Musk vs. the Shorts’ is a far better narrative than ‘Tesla vs. Mercedes/Audi/Porsche.’”
I’m not really sure Chanos was trying to say there. This was approximately 6 years after Tesla started selling the Model S and the Model S had long surpassed its Mercedes, Audi, and Porsche competition in terms of sales. The Model 3 production ramp was just getting rolling, but we know now that the Model 3 was the #1 top-selling luxury vehicle (of any kind) in 2018 in the US. Tesla absolutely embarrassed Mercedes, Audi, and Porsche.
Again, I don’t actually understand what argument Chanos was trying to make. Nonetheless, it seems like it must have been a third strike.
In October of 2018, Chanos was back and seemed to be grasping at straws. “I can’t get them to profitability or free cash flow positivity without one-time items. And I think the market will see through those if that’s the case.”
Again, Tesla showed a profit in the 3rd quarter and 4th quarter of 2018. It also expects a slight profit in the 1st quarter of 2019.
Going on: “The bulls think this is a technology company, yet it’s a company that is spending less on capital spending than it was forecasted. It’s falling behind big companies like GM, VW/Audi in software.”
But here’s the real doozy. It’s not a direct quote but is his opinion summarized: “Jim Chanos told CNN’s Julia Chatterley on ‘First Move’ Thursday that he thinks it’s a mistake for Elon Musk’s electric car company to make luxury versions of its Model 3. … Chanos says there’s only so much room in the luxury market — about a million cars a year.”
Wait, what? Tesla shouldn’t create and sell a super quick, high-margin Performance model? Does Chanos now think Tesla making high margins and a profit is illogical? I’m confused.
By the way, the Performance model didn’t come out of the blue. It was always part of the plan. Even its general release time was announced a year prior.
In December of 2018, buried on the bottom of a long interview, Chanos reiterated his short position in Tesla — “understand that it turned from a massive loss to the most profitable car company in the world in one quarter. To say that I’m skeptical about that I think would be understating it.”
I don’t really understand what kind of black magic he thinks is going on here. Tesla Model 3 production got to a high level, deliveries rolled out in record numbers for the vehicle class, and that continued again in the 4th quarter, with deliveries actually rising.
Yes, Tesla made a lot more money, because it got production and deliveries up to a much higher level. I’m not sure how you can be “skeptical” about that.
Chanos added, “this company had its big move in 2013 and 2014, and it has been pretty much sideways since. So I think the market is giving him the credit and benefit of the doubt for the future but I think that’s where it gets problematic. Because of course, what he was so successful in innovating and bringing to the market — high priced electric vehicles that were sexy — everybody else is now coming and they are coming down the pike. And Porsche and Audi – Audi and Jaguar are here, Porsche’s coming next year.”
Tesla sold far more cars in the 3rd and 4th quarters globally than either Jaguar or Porsche, despite not yet shipping the Model 3 beyond North America. How would Jaguar and Porsche all of a sudden double their sales to get ahead of Tesla again?
We’ll close out with one final December quote from Chanos, since I haven’t seen anything else since. “At what point do we say, ‘Okay, VW trades here. Toyota trades here. Mercedes trades here.’ They all are going to have their lines and Tesla is not even increasing its capital spending for its next product lines. So I was kind of wondering when is the next generation of vehicles coming? Because the valuation can’t support what it is doing with the Model 3 and the Model S And X. you have got to believe that the Model Y, the Semi, the Roadster, the pickup truck, are all coming soon.”
The Model Y is coming in 2020.