Author’s note: This article was updated on July 5, 2018 to remove an incorrect figure I mistakenly cited and to add new data about executive turnover. I apologize for my error.

Jim Chanos is perhaps the most prominent investor to talk publicly about his short position in Tesla (TSLA). At a conference in November, Chanos posed his rationale for shorting the stock this way: 

Put it this way. If you wouldn't be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.

In this article, I’ll challenge several key assertions made by Chanos. Previously, I addressed Tesla’s history of net losses. In brief, I disagree with Chanos' claim that the company is “structurally unprofitable”. My understanding is that, historically, Tesla has raised capital it doesn’t need to sustain its current sources of gross profit. It then invests an amount in R&D and SG&A that is in excess of its gross profit. This is in order to generate gross profit in future years. One result is that Tesla reports a net loss. The other result is that Tesla’s gross profit has grown at a 91.8% CAGR over the last 5 years. This is a trade-off many growth investors are willing to make. 

I also previously evaluated Elon Musk’s leadership as a CEO. Musk's track record at both Tesla and SpaceX (SPACE) is unparalleled by any other CEO in the world. SpaceX has handily outcompeted Boeing (BA) and Lockheed Martin (LMT), showing that long-established industrial titans don't always win. Investors interested in Tesla should see what they can learn from this example. I highly recommend Ashlee Vance’s book on the topic.

Like many critics of Tesla, Chanos likes to emphasize oncoming competition. That's a topic I’ve addressed at length. I argue that overall demand for electric vehicles will grow, and Tesla’s sales will grow along with it. I’ve also argued that Tesla is an excellent position to design, produce, and sell cars that consumers deem to have better price-performance than competing models, both gasoline and electric. 

In this article, I’ll focus on executive turnover, the cyclicality of the auto business, and Chanos’ prediction about Musk stepping down as CEO. 

Executive turnover

By “every executive leaving”, I take Chanos to mean that Tesla has abnormally high executive turnover. A 2014 study found that the average executive tenure at New York area financial companies was 5.0 years. The standard deviation was 3.7 years. A 2015 survey of U.S. executives across industries found an average tenure of 4.1 years.

Chanos’ own spreadsheet detailing Tesla’s executive departures shows an average tenure of 4.6 years among those who have left the company. Similarly, Christian Prenzler at Teslarati found an average tenure of 4.5 years among Tesla executives.

In statements to Bloomberg, Tesla claimed that of its “senior leadership team”, 75% had at least been there over 3 years, 60% had been there at least 6 years, and 20% had been there at least 10 years.

Of the 75% of the senior leadership team accounted for, the average tenure is at least 6.4 years. Even if the remaining 25% only stayed in their jobs for a single day, the average tenure of the senior leadership team would still be over 4.8 years.

All of these sources of data put Tesla’s executive tenure close to average. Based on the information I can find, there is no evidence to support the claim that Tesla has an abnormally high rate of executive turnover.

A prototype of the new Tesla Roadster. Photo by Smnt.
 

Auto business cyclicality 

It’s true that the vehicle sales business is cyclical. However, the vehicle sales model will eventually give way to an autonomous ride-hailing model. With the advent of fully autonomous vehicles, it will no longer make sense for the vast majority of individuals to own them. Shared fleets of autonomous vehicles will be the primary form of automotive transportation.

The uncertain aspect is timing. General Motors (GM) plans to launch an autonomous ride-hailing service in 2019. Tesla has not yet set a target launch year for The Tesla Network, its autonomous ride-hailing service. However, CEO Elon Musk has said he thinks that Tesla’s fully autonomous vehicles will drive 10x more safely than human drivers in 2020.

If GM and Tesla deliver on fully autonomous vehicles in the next 2-3 years, then on a 5-year investment timeframe the cyclicality of the vehicle sales business is of relatively small importance. That business model will begin to rapidly be replaced by the autonomous ride-hailing business model.

Chanos is aware of this line of argument. His counter is that Tesla is behind on autonomy. Tesla, he says, only has Level 2 autonomy, whereas Waymo (GOOG, GOOGL) has Level 4 autonomy. However, this is an inaccurate statement.

Tesla has Level 2 autonomy that is commercially available to the general public. It also has Level 4 autonomy under development. Waymo has no autonomy commercially available to the general public. It has Level 4 autonomy under development, and available to a small group of non-employee testers in parts of the Phoenix metro area. This is a show of confidence by Waymo and a sign of progress, but like GM or Tesla, Waymo may be years away from launching a full-fledged autonomous ride-hailing service. 

Chanos also argues that Tesla is behind Audi (VLKAY) because Audi is deploying Level 3 autonomy. The statement that Audi is deploying Level 3 autonomy is accurate, but the conclusion that Audi is ahead of Tesla in autonomy does not follow. 

Audi has a feature called traffic jam pilot that can be engaged on freeways at speeds at under 37 mph. When traffic jam pilot is engaged, Audi allows drivers to close their eyes and take their hands off the wheel. This makes the feature qualify as an instance of Level 3 autonomy. However, its actual demonstrated driving capabilities no better than what is in a Level 2 system like Tesla’s Autopilot or GM’s SuperCruise. The only difference with Audi’s system is that it gives the driver permission to stop paying attention. It is not a demonstrably more advanced technology. 

Tesla’s main advantage in autonomy is its use of over 120,000 production vehicles equipped with radar, ultrasonics, and 360-degree cameras to collect driving data. No other company is pursuing this approach. Instead, competitors are relying on small numbers of test vehicles to collect the data they need. This approach may not collect enough data on rare events to develop fully autonomous cars that are safer than humans, at least not in a reasonable timeframe. This remains to be determined. The only way to find out is to wait and see.

Elon Musk’s future at Tesla

In November, Chanos predicted that Tesla’s CEO Elon Musk will step down by 2020. It is still possible that this will happen. However, Tesla just announced a new compensation plan that makes this seem less likely. The plan based Musk’s compensation entirely on revenue, market cap, and EBITDA milestones over the next 10 years.

In order for Musk to receive any compensation when a milestone is met, he must either a) continue to serve as CEO or b) continue to serve as Executive Chairman and also serve as Chief Product Officer, with a CEO who reports to him. Either way, Musk must continue to lead the company to receive compensation. In May, Musk said, “I intend to be actively involved with Tesla for the rest of my life.” 

Conclusion 

I’m interested to know if Chanos has access to any private research that indicates Tesla has an abnormally high rate of executive turnover. In one interview, he mentioned that his team has a spreadsheet, but didn't say if they also track other companies to compare. Barring such a comparison, I don't know how you can say what’s high, what’s low, or what’s average. 

Chanos seems to misunderstand the current competitive landscape of autonomous car technology and the significance of the SAE levels of automation terminology. This misunderstanding makes his overall thesis far less credible.

Chanos’ prediction that Musk will step down as CEO may still come true, but even if Musk doesn't stay on as CEO, it seems increasingly likely that he will continue to lead the company over the long term. It’s important to note that if Musk switched his role from CEO to Chief Product Officer, he wouldn't necessarily spend fewer hours at the company. From what I understand, Musk would shift his attention away from the day-to-day operations of the company and toward strategy, technology, engineering, and design. Chanos’ prediction was that Musk would leave his leadership role at Tesla and shift his attention to SpaceX.

So, several of Chanos’ key claims about Tesla are inaccurate, not publicly substantiated, or (in my view) unlikely. For that reason, I think Chanos has made an uncompelling argument for shorting Tesla.