Short-seller Jim Chanos made headlines this week by loudly calling Tesla Motors Inc (NASDAQ:TSLA) a “walking insolvency” because of its pending acquisition of SolarCity Corp (NASDAQ:SCTY). Chanos, who famously shorted Enron and then Valeant Pharmaceuticals Intl Inc (NYSE:VRX), pointed to recent executive departures at TSLA and the company’s continuing need to raise capital for his call.
Chanos has been betting against SCTY stock for over a year, and took losses before profiting handsomely, as the share price fell from $58 per share to $17 in the last year. He has also been betting against Tesla since spring, and made headlines this time because he discussed it at the CNBC-Institutional Investor “Delivering Alpha” conference.
Chanos’ calls have the power to move markets, given his track record, but could he possibly be wrong this time?
Elon Musk’s Big Bets
Elon Musk, who chairs both TSLA and SCTY, along with SpaceX, is making a host of big bets all at once.
He has gambled on creating reusable rockets, although a SpaceX vehicle recently exploded on the launch pad. He has gambled he can scale Tesla production to 500,000 cars per year, and now claims to be up to 2,000 per week. And he has been behind SolarCity’s switch from being a seller of solar panels to a maker of panels, with its government-backed Gigafactory in Buffalo.
Each of these bets is a high-wire act. They’re things no other entrepreneur would try. He is worth $11.4 billion, but that’s mainly in stock at his companies. He could indeed crash and burn. He could die broke.
The SCTY Bet
But the SolarCity bet, in particular, is being misunderstood.
Focusing solely on the company’s success as a seller of residential panels — where results are currently poor — is the wrong place to look. That’s the business SCTY is getting out of.
The company is monetizing those installations and putting the money into panel production, with the Buffalo operation due to open next year. The production of that factory is certain to see demand. The U.S. alone installed 2.051 GWatts of panel production in the second quarter of 2016. That’s 43% growth year-over-year.
Over the last two years, solar has also reached “crossover,” the point where it becomes cheaper to use panels to produce power than to use fuel. The timing varies from place to place, and it has been delayed by the continuing glut of natural gas, but the panel technology SCTY acquired last year with Silevo already delivers 22.5% efficiency and costs just 55 cents per watt.
The Silevo deal delivered SolarCity vertical integration in panel production. The Buffalo factory will deliver scale. Tax credits meant to make solar competitive have been extended, meaning panels are the cheap energy now and should be in the future, even without another technology breakthrough.
Bottom Line on TSLA and SCTY Stock
Musk’s bets on SCTY and TSLA are identical. He is betting, not that he can produce products that attract buyers, but that he can scale that production. Chanos is looking at the current numbers and saying they’re unsustainable. Elon Musk is looking at his future production runs and predicting he can succeed.
This is not Valeant, which used a business model predicated entirely on government looking the other way while it hiked prices and exported profits. This is not Enron, which used a business model predicated on government ignoring its control of key energy markets.
This is a traditional entrepreneur betting he can scale production of products he’s already making, for markets where demand is growing. Whether Elon Musk can deliver before the cash runs out is a risk, but it’s the kind of risk that makes America great.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
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