Jim Chanos Adds To Tesla Short, Sees Musk Stepping Down

The ongoing vendetta between the scourge of Enron, Jim Chanos, and Elon Musk escalated when the Kynikos Associates founder said he has been adding to his Tesla short position throughout the year even as the company’s shares soared to record highs. Speaking at the Reuters Global Investment 2018 Outlook Summit, Chanos - who first disclosed his TSLA short last May - said that he expected Elon Musk to step down from his position by 2020 to focus on his private rocketship company SpaceX as competitors such as BMW and Porsche expand their lines of luxury electric vehicles.

“Obviously this is not being valued as a car company, it’s being valued on Musk ... he’s the reason people own the stock,” Chanos said.

“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.”

He said the company is burning more than $1 billion in cash each quarter and will have a harder time tapping the capital markets if and when Musk leaves

Still, while Chanos may have had a large enough balance sheet to avoid a short squeeze, others have been less fortunate, and as a result Tesla shares are up 44% for the year to date, briefly rising above General Motors in market cap, as countless shorts have been margined out despite Tesla's chronic - and often shocking - cash burn, and despite increasingly louder concerns that Tesla will be unable to deliver on its aggressive Model 3 timetable. Just last week, Tesla reported its largest-ever quarterly loss, unveiled it had burned a record $16 million per day...

... and pushed back its target of volume production of its new Model 3 sedan by three months. The company said it now expects to build 5,000 Model 3s per week by late in the first quarter of 2018 from its original target date of December. And yet, despite the production delays or perhaps due to them, the company has been a veritable widowmaker for shorts, with losses among funds that bet on its decline totaling more than $4 billion this year, according to S3 Partners and Reuters.

To be sure, Chanos is not alone in shorting TSLA, and some other notable skeptics who have likewise bet on Tesla's demise include:

  • Mark Yusko, founder and CIO at Morgan Creek Capital Management.
  • Mark Spiegel of Stanphyl Capital Management.
  • David Rocker, formerly of Rocker Partners.
  • Anton Wahlman, former stock analyst who now writes about the auto industry (he said he currently holds no position on Tesla)

Their short thesis is roughly captured by the following 7 points:

1. Negative Cash Flows

“If you can’t make money selling a $100,000 car to rich people, how are you going to make money selling a $45,000 car to normal people?” Rocker told The Times. He was referring to the upcoming mass-market Model 3. “I’m saying they’re going to lose money on every Model 3 they build and sell,” Spiegel said. Based on Tesla’s Q4 2016 earnings report, he figured the combined average selling price for non-leased Model S and X is about $104,000 and the combined average cost of building them about $82,000.

2. Competition from the Big Guys

Electric vehicles are still only a tiny fraction of total new vehicle sales in the US. Tesla sold about half of them. In March, according to Autodata, Tesla sold 4,050 vehicles in the US, similar to Porsche. All automakers combined sold 1.56 million new vehicles. This gave Tesla a market share of 0.26%. "Tesla faces a formidable set of competitors, and they’re coming in with guns blazing,” Wahlman told The Times. “Once the market is flooded with electric vehicles from manufacturers who can cross-subsidize them with profits from their conventional cars, somewhere around 2020 or 2021, Tesla will be driven into bankruptcy,” Spiegel said.

3. Tesla’s vanishing tax credits

The federal tax credit of $7,500 that EV buyers currently get is limited to 200,000 vehicles for each automaker. Once that automaker hits that point, tax credits are reduced and then phased out. Of all automakers, Tesla is closest to the 200,000 mark. Under its current production goals, the tax credits for its cars could start declining in 2018. This would give competitors, whose customers still get the full tax credit, a major advantage. About 370,000 folks put down a refundable $1,000 deposit on Tesla’s Model 3, perhaps figuring they’d get the $7,500 tax credit. But as it stands, many won’t. Rocker thinks that this is going to be an issue. The refundable deposit “commits them to nothing,” he said. Those that don’t get the tax credit may just ask for their money back and buy an EV that is still eligible for the credit.

4. The Question of patent protection

Tesla has made its patents available to all comers, thus lowering its patent protections against competitors. Also, the key part of an EV, the battery, is produced by suppliers; they, and not Tesla, own the intellectual property. This is true for all automakers. But Tesla might still be closely guarding crucial trade secrets that are not patented.

5. Musk’s distractions from his day job

Musk has a lot of irons in the fire: Tesla, SpaceX (with which he wants to build a colony on Mars or something), solar-panel installer SolarCity which Tesla bailed out last year; projects ranging from artificial intelligence to tunnel digging; venture capital activities…. “He’s all over the map, from tunneling to flights to Mars to solar roof tiles,” Rocker said. These announcements have the effect of boosting Tesla’s stock: “It’s ‘Let’s get the acolytes excited. Implant in the brain! Let’s buy Tesla stock!’”

6. Execution risk

“Investing is all about possibility and probability,” Yusko said. “Is it possible that Tesla will produce 500,000 cars in the next two or three years? Yes. Is it probable? No.” Tesla has missed many deadlines and goals, and quality problems cropped up in early production models. As Tesla is trying to make the transition to a mass-market automaker, execution risk will grow since mass-market customers are less forgiving.

7. Investor fatigue

Having lost money in every one of its 10 years of existence, Tesla asks investors regularly for more money to fill the new holes. In March, it got $1.2 billion. In May last year, it got $1.5 billion. Tesla will need many more billions to scale up production and to digest the losses. Tesla has been ingenious in this department. But when will investors get tired of it? “We’re awfully close to the point where people wake up and realize these guys are seriously diluting our equity” with new stock and convertible bond issues, Yusko said. According to The Times, Yusko “is looking for the moment when the true believers begin to lose faith.”

Comments

wmbz Tue, 11/14/2017 - 15:55 Permalink

Musky's Butt buddy and sugar daddy, Obozo can no longer pass out free shit/money to Elon. Sounds like he will have to face the music.Of course he'll leave everybody else holding the bag. Asshole!

buzzsaw99 Tue, 11/14/2017 - 15:57 Permalink

About 370,000 folks put down a refundable $1,000 deposit on Tesla’s Model 3...no shit?  wow.  they will be waiting a long time but i had no idea they could sell that many cars if only they could make that many that is. how much wood would a woodchuck chuck...

Two-bits buzzsaw99 Tue, 11/14/2017 - 16:21 Permalink

Elon Musk and Jeff Bezos make a bet of who can get to Mars first. Each of them spends their Fortune to get a rocket built to get them there as fast as possible. They both take off, and the race is neck-and-neck the entire way until they collide into one another inside the Martain atmosphere and crash down to the planet surface. Who is the winner?Earth

In reply to by buzzsaw99

Cozy Vanilla Sugar Rainman Tue, 11/14/2017 - 17:55 Permalink

It's because they believe there is gigantic residual value in the later years as Tesla achieves economies of scale that justifies the current outrageous valuation relative to trailing results (i.e. the Peter Thiel unicorn valuation method).Unfortunately, they are applying this concept to the wrong type of company (i.e. highly capital intensive and soon-to-be highly competitive business model with zero chance of a monopoly position).

In reply to by Rainman

roddy6667 Cozy Vanilla Sugar Tue, 11/14/2017 - 19:50 Permalink

If Tesla had any proprietary trade secrets that would provide a moat to deter the competetion, they might recover to make huge profits in the future. They use 20 year old Lithium Ion battery technology. Nothing new here. Many financially sound companies all over the world are producing  electric cars that the average family can afford. Their cash burn can only end in BK. And not the city in Thailand.

In reply to by Cozy Vanilla Sugar

FORD_FIESTA Tue, 11/14/2017 - 16:00 Permalink

the year........2025"Grandpa, I learned in school of an old car company that went out of business""Well kiddo, did you learn about the Edsel? Maybe the Corvair?""No, it was called something like Tesler, Taser, ummmmm, Tesla, ya that's it! Tesla!""Well kiddo, your grandaddy really got screwed on that one,,,HAHAHAH!"

DC Beastie Boy Tue, 11/14/2017 - 16:02 Permalink

Electric cars are a big pain the fucking ass. Seriously, every electronic thing in my life is a pain in my ass! Musk and Branson and every other tax subsidized outer space fucktard can lick my musky balls!

Just saying..

abgary1 Tue, 11/14/2017 - 16:07 Permalink

The whole global warming theory is a fraud.Co2 is not a GHG and does not cause global warming.Solar panels and battery are going to useless as we going into a downturn in global temperatures.Unless NASA is lying about the coming Maunder Minimum, it is possible we may even go into an ice age.Read The Chilling Star: A New Climate Change Theory by Sevsmark and Calder to understand the science behind the cosmic ray theory and the implication of a Maunder Minimum.We are presently in an interglacial temperature peak which won't last and we will need as much cheap energy as we can get.The only people more insane than Elon Musk are the federal Canadian Liberal Party and the Alberta/Ontario provincial governemts who are trying to destroy the Canadian oil industry.

arrowrod Tue, 11/14/2017 - 16:22 Permalink

 Normally, ZH commenters are clever.  So far, a bunch of morons have invaded the comment section.Who wouldn't want Musk to be on their team?  Money manipulators vs creator.

CNONC arrowrod Tue, 11/14/2017 - 16:41 Permalink

Profit generally is the sign that you have actually created something, rather than consumed something.  It is the indication that more value exists after your exertions and use of resources than before.  Subsidies and cash from the sale of fake commodities (offsets and carbon credits) are forms of rents, or manipulations of money. 

In reply to by arrowrod