Tesla Motors Inc: This Is Why Jim Chanos Is Bearish on Tesla Stock

Tesla Motors IncJim Chanos Is Betting Against Tesla Stock

No doubt, Jim Chanos is one of the best short sellers on the planet.

In 1985, he founded Kynikos Associates, a New York City-registered investment advisory that is focused on short selling. Over the next three decades, Chanos went on to generate outsized returns for his investors, identifying financial blowups like Enron and Baldwin-United.

Because of his exceptional track record, I always pay close attention to what stocks Chanos is shorting. Right now, he’s making some interesting bets against Silicon Valley.

Time to Bet Against This Tech Darling?

In recent quarters, Chanos hasn’t hesitated to express his concerns about frothiness in the stock market. He’s sitting on a huge paper profit after betting against LendingClub. He has also built up huge short positions on other stock market darlings like Valeant, Alibaba, and SolarCity. (Source: “Hedge fund billionaire Jim Chanos is on a roll,” Business Insider, May 13, 2016.)

Chanos has also picked up a new position. Earlier this month, the billionaire investor disclosed a short bet against electric vehicle–maker Tesla Motors Inc (NASDAQ:TSLA) stock. (Source: “Jim Chanos is betting against Elon Musk—here’s why,” Business Insider, May 4, 2016.)

It’s an odd bet for sure. On May 4, CEO Elon Musk stunned the automotive world after he ramped up his production targets. Musk now plans to deliver 500,000 vehicles by 2018, two years earlier than originally expected. (Source: “Tesla First Quarter 2016 Update,” Tesla Motors Inc Investor Relations, May, 4, 2016.)

To date, Tesla has received over 400,000 reservations for the new “Model 3.” For Tesla, this represents more than $14.0 billion in future orders and marks the biggest consumer product launch in history. The one-two punch of soaring sales and world-changing potential has made Tesla one of the hottest stocks over the past five years. (Source: “Tesla’s Model 3 Reservations Rise to Almost 400,000,” Fortune, April 15, 2016.)

Chanos, though, sees some holes in this story.

First off, the 13-year-old Tesla Motors has delivered just less than 125,000 vehicles to customers since its inception. Last year, the company only managed to roll out 50,000 cars from the assembly line. Elon Musk’s new plan calls for ramping up production tenfold in less than 24 months.

This is the biggest automotive challenge since Henry Ford rolled out the “Model T.” Elon Musk will have to reinvent the assembly line, improving speed, quality, and efficiency. And while Tesla fans may be willing to accept recalls and glitches, mass-market buyers will be less forgiving.

The new Model 3 will have a base price of $35,000, undercutting most of the other electric vehicles on the market right now. Even if Tesla can ramp up production, he will have to figure out a way to keep costs down on one of the world’s most technologically advanced products. Otherwise, Musk will be losing money on every Model 3 sold and making it up in volume.

To make matters worse, Musk’s senior employees are fleeing the company. Earlier this month, Bloomberg reported that Tesla’s production bosses, Greg Reichow and Josh Ensign, will be leaving the company. With the exits, Tesla has now seen five vice presidents resign in just three months. (Source: “Two Tesla Production Chiefs to Leave Ahead of Model 3 Ramp-Up,” Bloomberg, May 4, 2016.)

“One of our historical signposts, of a company in trouble is when numbers of senior people leave over a short period of time,” Chanos explained during an interview on CNBC. “Tesla fits that bill.” (Source: “Jim Chanos, President & Founder, Kynikos Associates, Speaks with CNBC’s “Fast Money Halftime Report” from the Sohn Conference Today,” CNBC, May 4, 2016.)

Chanos also noted, “He has not enough production capability, he has not enough batteries, and now he has not enough executives, so what does he do? He pulls production two years forward. That’s a showman. I love it.” (Source: “Jim Chanos is betting against Elon Musk—here’s why,” Business Insider, May 4, 2016.)

Granted, Musk has stumped the naysayers before. Many analysts called the stock a dog when Tesla launched its initial public offering at $17.00 per share. It was only a few years ago when most people were saying all-electric vehicles would never have mass-market appeal. After the recent run in Tesla stock and the success of the Model 3, most of those skeptics are eating crow.

And as long as investors have baked some risk-premium into the share prices, there’s nothing wrong with having a bold, ambitious expansion plan. But judging by the valuation of the stock, investors have assumed there’s already a Tesla in every driveway. Today, shares trade at 75 times the company’s projected 2017 earnings (the key word here being “projected”) and is worth a jaw-dropping $27.1 billion.

Put it this way, Fiat Chrysler Automobiles NV (NYSE:FCAU) produced 4.5 million vehicles last year and turned a profit of $410 million. However, this company has a market value of only $9.9 billion.

Last year, Renault SA produced 2.8 million vehicles and turned a $3.3-billion profit (six times Tesla’s total revenue), yet this automaker’s market cap, at $27.7 billion, is almost identical to Tesla’s.

The Bottom Line on Tesla Stock

Tally up all the problems—Tesla’s shoot-for-the-stars roll-out, executives fleeing the company, and a nosebleed valuation—and it’s no wonder a legendary short seller like Jim Chanos is betting against the company.

Fans see a business that will change the world. Smart investors see an overpriced stock.
Image source: Flickr; Image copyright 2013, Asia Society