Whether Tesla Motors Inc (NASDAQ:TSLA) is absolutely “crazy” for considering a merger with SolarCity Corp (NASDAQ:SCTY) or whether shareholders who agree to bail out the solar power company can be deemed at “the height of folly” for their judgement is debatable; but not if you are Jim Chanos.
At the CNBC Institutional Investor Delivering Alpha Conference in New York, Chanos did not make his bearish attitude a secret, dismissing the company’s business model as “uneconomic.”
The next question: Do you really want to bet against Jim Chanos?
This short-seller’s opinion bears weight in the investor world, as few people suspected fraud, bet against Enron before it crashed, and still emerged victorious. To say the least, since his claim to fame in 2001, Chanos, founder of Kynikos Associates, can be considered somewhat legendary in the stock-verse for his sharp calls.
So if Chanos is calling the electric car maker out, to put it quite bluntly, as a “shameful example of corporate governance at its worst,” for its objective to deal in the works to take over SCTY, it is not a great time to be TSLA CEO Elon Musk.
In fact, Chanos has gone as far as to take such shots as to compare Musk’s company to the troubled biotech giant Valeant Pharmaceuticals Intl Inc (NYSE:VRX) back in July for the automaker’s eight-executive departure. Since then, the giant’s stock has crashed 90% in trading. If Chanos’ foreshadowing remains spot-on, that does not bode well for TSLA.
Furthermore, the prominent short-seller went as far as to deem TSLA as “anything but” Amazon, and adding insult to injury, the “anti-Amazon.” Chanos explains, “What made Amazon great… is that they didn’t need capital,” even when the online streaming leader had obstacles in persisting to be a profitable company.
In Chanos’ eyes, Musk does not measure up to Amazon.com, Inc. (NASDAQ:AMZN) founder Jeff Bezos, as the short-seller makes his criticism known that borrowing from capital markets is not the ideal strategy.
Even if Tesla has been successful so far in boosting equity when needed, Chanos counters that not enough attention underscores “the actual financial statements” of companies in general, nor are people savvy enough to recognize Tesla is dancing with fire when it comes to real risks at play.
If Chanos proves right, and his dreaded nightmare team of TSLA/SCTY comes to pass, the new Tesla-SolarCity merger company could be looking at a cash burn in the ballpark of $1 billion each quarter, putting Musk in a position to “constantly need access to capital markets,” the very approach Chanos condemns.
As far as the short-seller is concerned, “[…] when you need that amount of money just to run your business model, you put yourself at risk.”
Like the now-infamous Valeant, weighted with legal shackles and cracked investor confidence, Chanos believes he has every reason to predict Tesla will be the next big stock to fall; especially if Musk follows through with his acquisition of the financially-struggling SCTY.