In yesterday’s note I praised Elon Musk’s aggressive, not-to-be-denied leadership of Tesla, a style befitting visionaries who have to fight against doubters for every yard of progress. But even visionaries must someday deliver financially; if their vision doesn’t eventually earn back the cost of the capital that went into it, plus a bit more to compensate the early investors for the risk they took, then it’s just a mirage. Yesterday famed short-seller Jim Chanos argued that Tesla is that second kind of vision – a fantasy, not a business. And I always take Chanos’s views seriously.

He’s best known for shorting Enron back when most of Wall Street was swooning over it. But I first learned about him many years earlier, when Wall Street was falling for a company called Baldwin United. I thought the Wall Street consensus was right and said so in print. Chanos, having only recently graduated from Yale, thought it was wrong. Within two years, Baldwin United filed for what was then the largest bankruptcy in U.S. history.

Now Chanos is shorting Tesla and its cousin, SolarCity, and as usual, his argument is impressive. Tesla plans to buy SolarCity, a deal that Chanos calls “crazy” and “the height of folly” because SolarCity’s business model is “just plain uneconomic,” and the deal’s only rationale is “to in effect bail out the shareholders of SolarCity.” So why would the companies’ shareholders agree to the deal? Maybe, says Chanos, because the two sets of shareholders are in large part the same; Musk owns over 20% of both companies and is on both boards. SolarCity’s CEO, Lyndon Rive, is Musk’s cousin, and Musk’s brother, Kimbal Musk, is on the Tesla board. Elon Musk and Lyndon Rive recused themselves from the board votes on the deal. Chanos nonetheless calls the proposed deal “a shameful example of corporate governance at its worst.”

If the deal goes through, the result won’t be pretty, Chanos argues. The combined company will have an astronomical burn rate of about $1 billion a quarter, he says. That’s capital that must eventually produce a return exceeding its cost, an achievement that gets harder as the capital’s cost builds over time.

There’s more. Chanos questions Tesla’s ability to produce its Model 3 on time and on budget. He notes that several high-level executives have left in recent months, always a danger sign.

It’s possible that five years from now, Tesla will be a roaring success that transformed the auto industry, and Musk will sit in the pantheon of visionaries alongside Jeff Bezos, Steve Jobs, and Henry Ford. But Chanos believes Tesla will “continue to need more and more capital” and will “continue to lose lots of money,” and Chanos must be taken seriously. If he’s right, we’ll have to conclude that Musk was a brilliant and inspiring leader who was driven by a vision that turned out to be a delusion.

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