E What Jim Chanos Gets Wrong About Tesla

Author’s note: This article was updated on July 5, 2018 to remove an incorrect figure I mistakenly cited and to add new data about executive turnover. I apologize for my error.

Jim Chanos is perhaps the most prominent investor to talk publicly about his short position in Tesla (TSLA). At a conference in November, Chanos posed his rationale for shorting the stock this way: 

Put it this way. If you wouldn't be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.

In this article, I’ll challenge several key assertions made by Chanos. Previously, I addressed Tesla’s history of net losses. In brief, I disagree with Chanos' claim that the company is “structurally unprofitable”. My understanding is that, historically, Tesla has raised capital it doesn’t need to sustain its current sources of gross profit. It then invests an amount in R&D and SG&A that is in excess of its gross profit. This is in order to generate gross profit in future years. One result is that Tesla reports a net loss. The other result is that Tesla’s gross profit has grown at a 91.8% CAGR over the last 5 years. This is a trade-off many growth investors are willing to make. 

I also previously evaluated Elon Musk’s leadership as a CEO. Musk's track record at both Tesla and SpaceX (SPACE) is unparalleled by any other CEO in the world. SpaceX has handily outcompeted Boeing (BA) and Lockheed Martin (LMT), showing that long-established industrial titans don't always win. Investors interested in Tesla should see what they can learn from this example. I highly recommend Ashlee Vance’s book on the topic.

Like many critics of Tesla, Chanos likes to emphasize oncoming competition. That's a topic I’ve addressed at length. I argue that overall demand for electric vehicles will grow, and Tesla’s sales will grow along with it. I’ve also argued that Tesla is an excellent position to design, produce, and sell cars that consumers deem to have better price-performance than competing models, both gasoline and electric. 

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Disclosure: I am long TSLA.

Disclaimer: This is not investment advice.

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Barry Hochhauser 4 months ago Member's comment

You've made some excellent points about #Tesla to discredit #JimChanos. But is there anything he said that you agree with? $TSLA

Trent Eady 4 months ago Author's comment

Great question. Thank you. I agree with Chanos that it is dangerous for a company like Tesla to be reliant on the capital markets. This risks a situation where perception matters more than reality. Regardless of the reality, if perception is negative, then capital markets might not supply the needed cash. Perception is largely outside Tesla’s control, and many actors have a vested interested in turning perception negative, or have a grudge or emotional animus against the company. Human psychological bias and systemic media bias are working against Tesla here, too: medium.com/.../the-truth-about-tesla-c4b6d7e43ad7

So, the faster Tesla gets to GAAP net profit and positive free cash flow, the better. The company’s fate will then be decided by reality, not perception. I believe in the technology, so I think if Tesla can be left to develop and deploy its technology over many years, it will be an incredible success.

Brian Ramsey 9 months ago Member's comment

You are long #Tesla due to their Autonomous driving advantage. Let's stick with that since the horrific financials don't seem to bother you.

Tesla collects data from its cars as they are driven and occasionally driving themselves. However, when there has been a crash of a Tesla driving itself, we have never seen the video of the crash. That is because Tesla's cars are not collecting video despite having only "optic sensors". It would require a large bandwidth or decent sized storage capacity for video for Tesla to be collecting useful data from its cars. I am not seeing either of those in the teardown of the Tesla autonomous driving board.

I think it fairly obvious that Tesla cars merely collect telemetry data to record what the driver or car did prior to an accident. That data isn't useful enough to train a car how to drive itself.

While other autonomous car developers are using custom servers and the best boards and chips that #NVidia can design, Tesla is making noises about making their own custom chip from scratch (#Intel isn't able to compete with NVidia or #AMD, but suddenly Tesla can?) or switching to cheaper AMD parts.

Tesla's autonomous driving capability is hype and a willingness to endanger its customers. That ought to make you suspicious about the rest of the company, sadly I doubt that it will.

Autonomous driving Level 4 and 5 is coming in the next two to three years, but Tesla is at the back of the pack and not improving from Level 2.

If they refuse to sell their $TSLA stock, what TSLA stockholders ought to do is protect their investment with long protective puts. And please diversify so that Tesla's auditors declaring a "going concern" won't destroy your retirement portfolio.

Trent Eady 4 months ago Author's comment

Hi Brian. Tesla does collect images from the production vehicles’ cameras. This presentation by Tesla’s Director of AI shows some of the images Tesla has collected and how it goes about labelling them: https://vimeo.com/272696002

Some Tesla customers have found their cars uploading gigabytes of data to Tesla’s servers: electrek.co/.../tesla-autopilot-data-floodgates/

The cars are not recording video all the time. They may collect short video clips at random moments, or collect video when certain conditions are met (e.g. a construction zone is detected) and that triggers a recording.

Tesla wants to make a custom ASIC (en....pedia.org/.../Application-specific_integrated_circuit) to run deep neural networks. Currently, I believe it uses Nvidia GPUs. Designing a purpose-built chip makes sense because it allows for potentially much greater efficiency than a GPU. Tesla also believes that vertically integrating as many components of the self-driving system as possible will lead to greater efficiency.

Susan Miller 9 months ago Member's comment

You offer much food for thought Brian Ramsey. I hadn't put much though into it, but it is highly suspicous that #Tesla does not collect telemtry data. I suspect they do, but do not make that information publicly known to protect themselves from lawsuits. That being said, I do think $TSLA has some potential.

Gary Anderson 9 months ago Contributor's comment

I want my fellow contributor to be one of the first to ride an autonomous vehicle, on a busy freeway. I am not saying to short TESLA. The rocket seems to work. But autonomous cars are a scam. JMO.

Trent Eady 4 months ago Author's comment

To build public trust in autonomous vehicles, I think there needs to be data transparency and scientific, statistical evaluation of the data. We need to prove that autonomous vehicles are safer before we deploy them at large scale. It is natural and human to have doubts about handing over control to a computer, and I think only robust statistical evidence can put those doubts to rest.

Gary Anderson 4 months ago Contributor's comment

There is likely no plans for robust data collection in any self driving car. As I wrote, Salesky says autonomous cars must take on thoughtfulness for them to really be able to work. Basically he is saying that the cars need to be Hal in a way. They need to think. They need to have judgement. You know and I know that is not going to happen: www.talkmarkets.com/.../the-waymo-tesla-self-driving-con

Trent Eady 4 months ago Author's comment

Here is what Elon Musk has said about collect data on the safety of autonomous cars:

“Even once the software is highly refined and far better than the average human driver, there will still be a significant time gap, varying widely by jurisdiction, before true self-driving is approved by regulators. We expect that worldwide regulatory approval will require something on the order of 6 billion miles (10 billion km). Current fleet learning is happening at just over 3 million miles (5 million km) per day.”

www.tesla.com/.../master-plan-part-deux

Tesla plans to collect billions of miles of data in “shadow mode”: https://ytcropper.com/cropped/5S5b3e33e7d93c5

Dick Kaplan 9 months ago Member's comment

Gary Anderson, I don't think #autonomouscars are a scam, it is just that there is a long way to go. But of the companies trying to dominate this space, wouldn't you say that #Tesla is one of the most likely to eventually succeed? I believe it will simply take much longer than they let on. $TSLA