Looks like hedge fund manager Jim Chanos is no fan of Elon Musk, the CEO of American electric car brand Tesla Motors Inc (NASDAQ:TSLA). Chanos, best known for successfully betting against Enron before it imploded, said he is convinced that Tesla’s days are numbered as Musk continues to campaign hard to acquire the automaker’s sister company, SolarCity Corp (NASDAQ:SCTY). He called the Tesla-SolarCity deal as a “walking insolvency,” noting that the “synergies are questionable at best.”
At the CNBC Institutional Investor Delivering Alpha conference, Chanos presented his best investment idea, reiterating his short bet against the carmaker, which he initially disclosed in May. Since his bold statement, Chanos has been comparing Tesla to Valeant Pharmaceuticals (NYSE:VRX), the drug company whose spectacular 90% fall continues to make analysts shudder even today. He added that Musk’s plan to buyout SolarCity is a “shameful example of corporate governance at its worst.”
Thanks to new information that the Model 3 maker disclosed recently, Chanos said it helped him understand “just how crazy this merger is and the damage it’s going to do to shareholders.” Tesla’s stock was trading down to 1.5% Tuesday afternoon.
The problem with teaming up with SolarCity is that both companies are facing a cash crunch. Additional plans to raise funds this year will burn a gaping hole in Tesla’s pockets. In fact, together, the companies have already plowed through $1 billion per quarter. Chanos noted that the companies “will constantly need access to capital markets and when you need that amount of money just to run your business model, you put yourself at risk.”
The hedge fund manager illustrated the risk by highlighting a section of a recent Tesla securities disclosure that revealed the struggling energy company’s failed attempt at securing a short-term loan from the carmaker. Tesla’s board rejected the request and sent SCTY to borrow funds somewhere else. Chanos says, if the solar company cannot even secure financing from its sister company and soon to be parent company, who is willing to loan SolarCity money?
Chanos also said that the deal between the two companies “to in effect bail out the shareholders of SolarCity…[s]trikes us as just the height of folly.”
When asked if Musk could replicate Jeff Bezos’ success with Amazon.com, Inc. (NASDAQ:AMZN), which is one of the market’s best performing stocks despite a volatile landscape, Chanos rejected the idea, calling the Tesla executive the “anti-Amazon.” According to Chanos, the difference between Amazon and Tesla is that while the e-commerce giant lost a lot of money on the bottom line, it has enough revenue coming in to get the business going. He added that Amazon never needed to go back to the capital markets to raise more funds outside since it became public almost 20 years ago.
On the other hand, Tesla is bleeding cash, losing funds by the billions “And continue to need more and more capital,” Chanos pointed out.
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It is true that Elon Musk is a doer and a builder, whose endeavors require brutally large amounts of capital. I think part of the negativity on the part of Chanos is the over financialized outlook on innovation, in other words, innovation is only useful if it makes money right away. Whatever you can say about Tesla, the cars are in great demand and a revenue stream is highly likely if production can ever begin. Production can only begin with massive amounts of blind capital being thrown in. You can kill this process with negativity, or you can promote with capital and positive ideas for improvement. Musk’s strategy with his NV plant, to start with a small footprint and then scale up as cash flow is created from auto sales, is the most cash efficient he can offer. Will the capital markets have the fortitude to enable an electric car industry?
Musk is nothing but a con artist on the scale of Trump. He has NEVER been the CEO of a profitable company (go check that!) and yet fools keep bank rolling him year after year. If he manages to get the Solar City deal through that will be the death of Tesla (18 months max). If the deal doesn’t go through, Solar City will die almost instantly and then the bloom will be off Tesla. It will whither and dry up and probably die when the Model 3 inevitably doesn’t live up to the implied promises. (either to the public or investors).
I have no position in Tesla, long or short.