E What Jim Chanos Gets Wrong About Tesla

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. 

In this article, I’ll focus on executive turnover, the cyclicality of the auto business, and Chanos’ prediction about Musk stepping down as CEO. 

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Disclosure: I am long TSLA.

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Brian Ramsey 3 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.

Susan Miller 3 months ago Member's comment

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

Gary Anderson 3 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.

Dick Kaplan 3 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