James Chanos, July 18, 2018, screenshot from CNBC, https://www.youtube.com/watch?v=4F2EigcLlZQ
Famous short seller Jim Chanos, who profited from the 2001 Enron fraud, said Tesla is an overhyped “Chinese car company” facing margin pressures and increased competition, and he has warned Tesla bulls that the good times are over forever.
Short sellers bet that the price of a stock will go down. They borrow a security and sell it on the open market, planning to buy it back later for less money. Long investors, by contrast, bet the price will go up.
Chanos expects earnings estimates to go down in 2023 and he used Tesla as a prime example during a Jan. 30 interview on CNBC’s “Fast Money.”
Street estimates for annual earnings have already fallen from $6 per share to close to $4, but they are going to come down even further, he said: “We think the number has a two in front of it this year.”
Everybody forgets Tesla lost money through 2019 building cars in the U.S., Chanos said. It wasn’t until they opened a factory in Shanghai that margins took off. Half of Tesla’s production takes place in China and almost all of its profits are generated there.
Tesla’s biggest market is now its weakest, and that’s going to hurt its margins, especially since Elon Musk’s company has struggled to be profitable outside of Shanghai, Chanos said. “Tesla is a Chinese car company. It really is.”
Chanos is telling Tesla shareholders that Elon Musk’s company is behaving like any mass-market car company pushing volumes into the market and hoping price cuts can lure incremental new buyers, Christiaan Hetzner wrote for Fortune.
In a Jan. 20 interview with the Wall Street Journal’s Gunjan Banerji, Telsa bull Ross Gerber asked Chanos why he would want to bet against the hardworking, unstoppable force that is Elon Musk. “We bought Tesla at $3 a share and it trades at $130 today,” Gerber said. “It’s been the best investment I’ve made in my career besides Apple … I just think you’re letting your emotions about Elon get in the way of your fundamental skills.”
What’s weighing on Tesla’s stock recently is its margins are going to go down with its recent price cuts, which will bring it in line with the rest of the industry in terms of margins, Chanos said. “Demand for their product began to drop well before the price cuts.”
Tesla shares were down 70 percent for the year at the end of December 2022, making its shares look cheap. On the first trading day of 2023, the price fell almost 15 percent to about $105.
At what price would Chanos exit the position? Here’s what Chanos said on Jan. 20, when Tesla was trading at $130. “We think the company is going to re-rate completely to that of other auto OEMs. Other auto OEMs trade at half of revenues, three to five times gross profits, and we think Tesla will have a slight premium to that … There’s also a disconnect between earnings right now. The trailing 12-month earnings for Tesla before tax credit sales fully taxed is about 250 a share. It’s not. And so the estimates for 2023, which was $6 at the end of September, are now 450 on my Bloomberg, but trailing earnings are only 250. So when you talk about ‘Well it’s really cheap,’ this is still a stock trading at 52 times that number … any tech stock showing declining earnings estimates tends to get re-rated pretty hard.”
The Tesla share price has since risen to trade at $190.68 as of this writing.
Chanos said he would rethink his position if he saw earnings accelerate — “if earnings were to re-accelerate and we’re now looking at earnings of $4 and $5 and $6. I think earnings are going to continue to come down — the stock would go lower if earnings went meaningfully lower from here.”
