Legendary short-seller Jim Chanos talks to P&I about his new bets

Legendary short-seller Jim Chanos, one of the best-known voices warning about overvaluation on Wall Street, talked with Pensions & Investments Thursday on Twitter Spaces, and revealed new short positions on technology companies IBM and Block, in addition to his continuing bet against electric vehicle maker Tesla and the crypto platform Coinbase.

In a two-hour interview with P&I Editor-in-Chief Jennifer Ablan, Mr. Chanos compared so-called "legal frauds" such as Enron, which collapsed two decades ago, to FTX and financial bubbles today. He shorts — or bets against — share prices through his hedge fund Chanos & Co., New York.

"FTX is one of the rare modern cases that looks like outright criminality with no one signing off on anything. No board, no CFO. With the caveat that we don't know everything yet, it appears to be large losses at Alameda ... were funded with customer accounts from FTX."

Mr. Chanos doesn't think FTX's failure "will be bigger than Enron, at its peak an $80 billion company. This one is pretty blatant. It's up there with (Bernie) Madoff. Losses were well into the billions, but probably not tens of billions. It's a cut-and-dry case of co-mingling customer accounts."

On FTX's disgraced founder Sam Bankman-Fried's post-collapse explanations and media tour: "I was stunned by what he was admitting in broad terms about the crypto eco-system, on how coins worked, and it was basically a Ponzi scheme. That right there was the first smoking gun."

As for electric-vehicle maker Tesla, Mr. Chanos said: "We're still short Tesla. Our view on Tesla is ... that it's a car company, not robotics, not robo taxi, not AI. Every bull market has an 'It Girl' that epitomizes that bull market," he said, and Elon Musk's Tesla is that, he said.

The automaker made the Tesla S "an aspirational vehicle. For that he gets all the credit in the world. But they sell luxury cars. Their margins are higher. But that's tougher and tougher to maintain. The luxury car market is only 4 million units a year, and 2 million in 2023. The problem is decelerating sales. People expect 40-50% (revenue) growth for the foreseeable future. It gets hard to put those numbers up."

Tesla trades at 20 times gross profits, which makes it "an incredibly expensive stock at $180."

Asked when he would take off his short position on Tesla, he said, "we have no idea."

ESG-themed investments is another area he said is ripe for short sellers.

"A lot of ESG stocks are basically at their highs right now, or near their highs. Solar, geothermal stocks. A lot of these business models don't make money and have never made money. They're valued on self-described metrics."

He's still short Sunrun, a residential solar panel installer.

"It's a roofing company with a finance subsidiary. They put panels on your roof," Mr. Chanos said.

Interest rates have gone up, "but Sunrun is still discounting cash flows at a 5% discount rate. Even though on their last conference call, their cost of capital was said to be 6.5%-to-7.5%. And their bonds yield 11% in the marketplace. So how they can with a straight face say you should discount these future cash flows at 5% discount rate when their own cost of capital is closer to 7%? It's outrageous."

Many ESG businesses are "seen as green plays. That's going to be a very interesting play on the short side."

"We're still short Coinbase," he said. "It's not about crypto prices for why we remain short. It's the business model. The crypto industry paradox is that they advocate for everyone to control their own crypto, to decentralize. But the cost structure is so high, that they need you on these exchanges" such as Binance, Coinbase and FTX. "They charge high fees and need lots of trading."

Coinbase is charging 2.6% for retail investor round-trip trades, yet the company is losing $500 million per quarter, he estimated.

"The business will come under immense top-line pressure, as more traditional institutions allow you to house crypto on their platforms."

Almost all fin-tech stocks, he added, have ended up trading at or around tangible book value, such as SoFi and Robinhood.

At the end of next year, Coinbase should trade at 4 times tangible book value, he estimated, or roughly $10 a share.

"It's our prime short in the crypto area."

His firm is also shorting Block, formerly known as Square, "not because of their crypto business, which is large top-line, but because it isn't profitable."

He shorted Block after "they paid an insane price for Afterpay," a buy-now-pay-later company. Block's stock trades at 60 times adjusted earnings, he said, and "GAAP numbers show they're losing money."

Mr. Chanos also has a short position betting against the share price of old-tech giant IBM, saying "it's an accounting story. They benefited this year from being a value tech company. I giggle at that. IBM is a body shop, not a tech company."

"Our simple metric is this: we look at IBM's GAAP operating earns, plus (intellectual property) and royalties which are legit businesses, minus interest and taxed at 21%," Mr. Chanos said.

That leads to his firm's estimates for IBM's current economic earnings total at about $5 a share, and "with the stock at $150, that's the most expensive it's been in a long time, for decades. And it's become expensive for a non-growth old tech company."

Despite a high dividend, "with higher interest rates the stock is less appealing. Its enterprise value to EBITDA is up there with the FANGs ... which is absurd."

Among the first things his firm looks at when researching a company is return-on-invested-capital, he said. "If your ROIC is below your cost of capital, that was the tipoff on Enron," he said.

Other metrics: "Are asset accounts growing faster than the business? Are inventories growing faster than cost of goods sold? Is depreciation realistic to capital?"

Asked how much more downside he sees in the stock market, Mr. Chanos said: "I've no idea. The last thing everyone remembers is the great financial crisis, but that's not how it's going to play out."

Instead, he sees more parallels with the bear market after 2000, when corporate earnings dropped 32%, the S&P dropped 40% and Nasdaq (fell) 80%.

"It was every bit as bad, and dragged out longer. And yet GDP grew slightly," he said.

"Corporations had a horrific time. Profit margins collapsed, equity markets collapsed. We could see that situation again," he said.