World's Top Short-Seller Has Bad News for Tesla Stock Investors
Sean O'Reilly, The Motley Fool
Updated
The bull market is nearing its end. And short-seller Jim Chanos, famous for calling Enron's bankruptcy, thinks Tesla (NASDAQ: TSLA) is one of the stocks primed to fall the hardest.
At a recent event in Detroit, Chanos didn't hold back in his criticism of CEO Elon Musk and company. "Every bull market has its poster children. Tesla is one of the bad ones," he said, according to Bloomberg.
Chanos' record of successfully predicting some of the biggest corporate blowups in history speaks for itself, but as we shall see, there is just as strong a perspective from the bull camp.
A bar chart with a red arrow tracing it up and then leading down to a crack in the floor
Image Source: Getty Images.
What's wrong with Tesla?
For one thing, according to Chanos, the company isn't making money. To him, the business seems structurally unprofitable: spending billions upon billions to get production to a mere fraction of that of the major automakers.
Chanos has a point. Tesla has barely registered a profit and hopes to produce 1 million cars by the end of the decade. For comparison, Ford sold over 6.5 million cars last year, and GM sold just under 10 million.
(Tesla believers, of course, note that Tesla is the U.S. market leader in electric vehicles (EVs) and a major player in the burgeoning autonomous driving market.)
Four Tesla Model S Roadsters parked on a cobblestone driveway.
Image Source: Getty Images.
It is these two points that Chanos believes solidify the case for betting against Tesla. According to Bloomberg, he said, "What Elon did was simple: He made EVs sexy."
Now that consumers have realized that electric vehicles can satisfy their needs, the other automakers are catching on. General Motors' Chevrolet Bolt is picking up steam in the self-driving technology space. Even Google owner Alphabet has a strong presence with its Waymo autonomous cars -- long a leader in the technology.
As time goes on, Tesla's aspirations are proving daunting, in Chanos' view. Fair point: The company produced less than 20% of the Model 3 sedans it planned in the third quarter of 2017 and has pushed back output goals by around three months.
To Chanos, Tesla's stock, which has risen some 60% this year, is ripe for a fall. It often pays to heed the words of Jim Chanos. He has been in the short-selling game -- identifying companies whose share prices have risen so far as to be detached from reality -- since 1985. His firm, Kynikos Associates, manages around $4 billion in private capital.
A firm that specializes in betting against stocks often has inverse returns to those of its long-biased peers. Recent years have been less kind to Chanos, but he has put up impressive gains for his investors in tumultuous times -- returning 19% versus the S&P 500's 37% drop in 2008, for example.
Famous bearish calls by Chanos include Enron, Commodore International, Conseco, Worldcom, and Tyco International. He's even made money in recent years betting against Brazilian companies Petrobras and Vale. It's an impressive list. But in a marketplace, for every bear, there's a bull.
And in this corner...
In stark contrast to Chanos' pessimistic view of Tesla stands Ron Baron, the billionaire founder of the money management company that bears his name. Baron hasn't been shy over the past year or so about his bullishness on Tesla.
Last summer, Baron told CNBC that he thought Tesla's share-price run was just getting started: "I think [Tesla stock] is going to be about $500 to $600 next year, and I think it's going to be $1,000 in 2020."
A year earlier, Baron said he expected his firm to make $6 billion to $7 billion (that's "billion," with a b) on the stock. A multibillion-dollar gain would be even larger on a percentage basis: Baron Capital's current Tesla investment currently amounts to around $500 million.
So, how exactly will Tesla generate these massive returns? Baron and his team believe Tesla will win out in the end by hitting its production goals of 1 million cars in 2020. By then, they expect it to be producing operating profit margins of around 10%.A profit margin of this level would be higher than GM's today, but Tesla might just pull it off thanks to its higher gross margins:
To close out his case, Baron points to Musk himself. One of the things he and his firm invest in is people, he told CNBC recently. Musk's long string of successes (including PayPal) is a strong endorsement that he will figure out how to make Tesla succeed. Baron seems to think the situation is reminiscent of Under Armour, another successful investment he made in his firm's early days.
Who is right?
The battle over Tesla's stock goes on, and the records of these two men speak for themselves. After reviewing each of the cases built by Chanos and Baron, it seems likely that both could be right.
The U.S. stock market is now eight years into a secular bull market. When the bull run ends, shares of Tesla, as one of its primary beneficiaries, would almost certainly fall -- severely. But looking further ahead, it is possible that Baron (who speaks of the ultra-long-term when queried about Tesla or any other investment) will get his billions in expected Tesla profits.
To investors who believe in Tesla's long-term potential, as Ron Baron does, Tesla's shares are a buy. But be warned, it won't be completely smooth sailing if Jim Chanos has anything to say about it.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), and Tesla. The Motley Fool has a disclosure policy.
