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.