Jim Chanos (Trades, Portfolio) is the president and founder of Kynikos Associates, a firm primarily focused on the short side of the market. Throughout his career, Chanos has called out a number of frauds, including Enron. Although the skills required to be a successful shortseller are different from those required to be a good long-only investor, the ability to correctly diagnose overvalued, or even fraudulent, companies is essential to both. In a recent interview with Hedgeye, Chanos discussed his short position on Tesla Inc. (TSLA, Financial), and explained his why he believes the company is headed much lower.
It’s just a car company
Chanos has had a very large and public short position in Tesla for several years now. Although CEO Elon Musk’s erratic behavior is one of the main reasons that Tesla bears point to when they say the company is going to crash and burn, Chanos’ core thesis does not really take that into account. He simply thinks that the numbers do not add up:
“This company is an auto OEM (original equipment manufacturer), and it is trading at 6 to 7 times, where all the other auto OEMs [are trading]. I posted something a while ago showing just how much Tesla looks like other auto OEMs, in terms of margins - except for valuation. The rest of the auto OEMs globally trade in an amazingly tight band of 0.5 times total enterprise value to revenues, and it’s been that way forever. It’s why auto stocks really don’t perform a lot, because it’s a capital-intensive industry and you get a valuation of 50 cents on the dollar for every dollar of capital you raise. It’s a problem!”
Chanos says that Tesla, as it currently exists, cannot be rationally valued at its current share price - the sum of its parts does not add up to anything near the current valuation. He believes that rather than reflecting the underlying reality, the current share price is the result of an investor belief that Musk’s futuristic promises of full self-driving robotaxis and other products with enormous margins will at some point come to fruition - an optimism that he obviously does not share.
“I believe that trailing 12-month operating income [for Tesla], including sales of tax credits, is under $200 million dollars - it’s terrible. The company has raised equity and net debt of $20 billion in its life. So it has taken $20 billion from investors to get you here. And there’s no return on the business. Now, will there be a million robotaxis next year? Well, there better be, right! Because just on the core business of making automobiles, this company is not worth anywhere close to the total enterprise value of $70 billion, and should be trading, of course, much lower.”
I believe that value investors are not as different as you might think from a value investing perspective. Paying an enormous premium for products that do not yet (and may never) exist makes little sense. Short sellers like Chanos just go one step further by actively betting against the business.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett: The Deck Is Stacked Against Shareholders When It Comes to Executive Pay
- Howard Marks: The 3 Stages of Any Bull Market
- Seth Klarman: How to Identify Market Mania
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