WHEN: Today, Friday, March 18, 2022
WHERE: CNBC’s “Closing Bell: Overtime”
Following is the unofficial transcript of a CNBC exclusive interview with Kynikos Associates Founder & President Jim Chanos on CNBC’s “Closing Bell: Overtime” (M-F, 4PM-5PM ET) today, Friday, March 18th, revealing Kynikos’ new short position in Coinbase. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
PART I
SCOTT WAPNER: Now to the investor known for his prowess betting against companies. Jim Chanos the president and founder of Kynikos Associates. He joins me now live. Welcome, Jim to “Overtime.” It’s so good to have you.
JIM CHANOS: Thanks, Scott and congrats on the new show.
WAPNER: Thank you so much. It’s, as I just said to Jim Cramer, Jim Chanos, what a week. It’s been from where we were on Monday to where we are now there is it feels like some newfound momentum in the market. Who knows if it lasts, obviously, but what do you make of where we are. Is now the time to cover shorts or to double down because of the kind of move that we’ve had? What do you think?
CHANOS: Well, while he was on, I was looking up the symbol for Joe Blow. It’s not one I know. But I think that what we’ve seen this week is a relief rally. You, you mentioned the bubble stocks, earlier the bubble stocks were leading the way this week. I have shorts that were up 30% and 40% since Tuesday morning, and we’ve seen the snapback in the Chinese market. And what’s really interesting about what happened prior to Tuesday and from Tuesday to today is we are starting to take for granted really massive moves in asset classes and entire markets. I pointed out to people a few days ago that the Chinese market prior to Tuesday was down basically by a third in a straight line over three weeks. And whether it was the US tech listed stocks or the kind of the Chinese SOEs listed in Shanghai and Hong Kong. And to put that in perspective, that was $4 trillion worth of market decline or 5% of global GDP, Scott. 5% of global GDP was exactly what all of the global markets lost in October of 1987 and I’m dating myself here, but but basically caused the world to have a heart attack. And in this case, we just sort of shrugged and said oh Chinese stocks are volatile. And then of course they bounce back. And so whether you see PayPal or or Netflix down $100 billion on news, Alibaba up $100 billion on government, government reassurances, these are becoming commonplace. And I think it’s just good to step back and realize a little bit about how uncommon these kinds of moves historically are.
WAPNER: Have you covered any of your shorts based on the kind of activity that you’ve witnessed?
CHANOS: No, we haven’t really covered a lot but because we have a lot of our positions in the form of put or put spreads, we actually get less invested as as the market goes up in our short only accounts and we’ve been about market neutral all week in our in our hedge fund.
WAPNER: I mean, you have had obviously a long history with China since you mentioned it you’ve been a bear since ’09. I mean, one of certainly the longest bears on Wall Street and there was a history as well with a one-time short, for example of Alibaba which you covered a long time ago, and I was curious as to how you viewed the not only the position of some of those stocks and how dramatically they fell because of the new regulations there, COVID which is by all accounts out of control, and I wanted to ask you what positions you have on now from a short side as it relates to Chinese tech stocks, internet stocks, or any Chinese stocks.
CHANOS: So we, we have a couple of Chinese financials that are listed in Hong Kong that have been long term core positions for us that are, we’re still on and of course we still have our position in Wynn, which has exposure to Wynn Macau, but the only the only tech stock of note and I think it was up, I think it was up about 70% from the lows this week, is the Chinese internet broker, Futu. And which is had quite a quite a run this year from from the highs earlier in 2021 of near $100 down to 20 and back up to 40. And it’s a simple story, trading stocks in the People’s Republic of China on Western exchanges, it is illegal and Futu is in the business of basically getting a Chinese citizens among other citizens to to trade stocks through Hong Kong or Singapore in Western markets, which is technically against the law in China. So it’s kind of a unique situation.
WAPNER: I mention. Yeah, I mentioned in a little bit you’re gonna reveal a new short position in a very well-known name. I don’t want you to do that yet. I want to continue the conversation about China I mean, in the universe of all of these stocks and you saw the dramatic move higher in Futu, of course, before you just started talking about it, why did this stand out more than some of the others? And are the others just too dangerous and difficult to short because of the kinds of moves which we’ve witnessed this week alone?
CHANOS: Well, really our exposure in China has been in the last few years, has been pretty much as low as it’s ever been because the excesses are here in the good old US of A and so that that’s number one. Number two, I mean the Chinese market as you alluded to the FXI when we got bearish was was somewhere around $40. I think it’s still around 32 or 33 after a big rally after 12 years. You know so this has been a very, very good place to be short as I keep telling people, but it’s not the greatest place risk reward to be short now and that with, with some exceptions, obviously. The thing we do warn clients about though repeatedly and it was part of our Alibaba warnings back in 2016 is the VIE structure. You know all kinds of people come on your network and talk about Alibaba being cheap or JD.com being cheap or Baidu being cheap, and it’s irrelevant. For Western investors, you do not own the company in the People’s Republic of China. I can’t stress that enough to people. We own a piece of paper in the Cayman Islands or British Virgin Islands that says you share the economics somehow. And and the Chinese love the VIE structure. They don’t recognize it legally in effect, but they love it because it allows Western capital to come to their companies inside the People’s Republic. The problem is the capital never goes back out the other way. And so we just warn people that you know, worst case environment, you have no recourse in the Chinese courts and it’s just fraught with all kinds of governance issues that I think that most institutional investors are wise to avoid.
PART II
WAPNER: We’re back now with legendary investor, Jim Chanos of Kynikos. Jim, I want to get to some names. I want to start with DraftKings. What’s your current position in DraftKings because you have had a bit of a feud with Jason Robins, the CEO, who has taken issue with the way that you’ve described some metrics of that company.
CHANOS: Yeah, so, so my BFF Jason got quite upset. Had his lawyer sent me a nasty letter. And we made a mistake on your “Halftime” show. We multiplied the holdings of 800 million shares times the market cap. There are 800 million shares outstanding in DraftKings, but 400 million are held by Jason and are uneconomic, they are the super voting shares. So they are worth nothing in the eyes of the marketplace. I actually think they’re worth something but that’s a separate story. So, the market cap of DraftKings is not, is not at the time was not 20, 23 billion. It was 11 and a half billion and so he got quite upset with that. I would point out the stock from that appearance however, is down about 28% from 28 bucks to around $20. But this is kind of an important theme I want to get across to your viewers, for stocks that have gone down, what I want to point out is that a lot of fundamentals have actually dropped at or worse than actually the stocks have declined in some cases. So for example, if we take my friend Jason’s company, the, the 2025 consensus EBITDA estimate in in early December when I was on the air with you, was $360 million. It is now $260 million. Interestingly, that’s down about the same 28% that the stock is down. So, in effect DraftKings today is selling at the same 2025 EBITDA multiple as it was in December. And we have lots of stocks in our portfolio where the actual numbers have deteriorated dramatically since the fall and the stocks are down 30%, 40%. But on valuation metrics, they’re they’re at or above where they were in the fall. And I think that that’s why the bubble stocks are so fraught with risk.
WAPNER: But to be clear, you’re still short. This name, right?
CHANOS: Oh, oh, yes. DraftKings is one of my favorite shorts.
WAPNER: Is that right?
CHANOS: Yeah, they’re, they’re EBITDA since since since my appearance on your show that he was upset about, the the EBITDA loss for this year, the estimate is gone from 500 million to 900 million. So, things are getting worse. They’re not better.
WAPNER: Well the other issue that he had he, they pretty much accused you of being dishonest in the way that you’ve described what their price to sales multiple is. In reality, it’s about 12 times you’ve described it, they’ve made the argument as 30 times and he took you to task for your math and that was after your last appearance on my show.
CHANOS: Yeah, that’s what I’m talking about, Scott. We got the share count, half the shares are uneconomic. So the company is claiming you cannot count those in the market cap. And they’re right.
WAPNER: Oh, I got you. Okay. I just wanted to make sure we’re talking about apples and apples. So you do admit that you had made a mistake on my program, the “Halftime Report” the last time that you were on.
CHANOS: Well, I know it’s shocking, but I sometimes make errors. They’re not in bad faith.
WAPNER: Okay, let me ask you this, your new short that you’re going to reveal right here is what?
CHANOS: Our new short is, is a kind of a one-off interesting situation. It’s a little company called Coinbase.
WAPNER: Okay, and why is Coinbase, why is Coinbase the one?
CHANOS: So Coinbase is what I’m kind of talking about. Coinbase is what we would call one of the bubble stocks. Obviously, it’s got a unique market niche as the, pretty much the only public crypto exchange and consequently has the valuation to go with it. So Coinbase is about a $40 billion market cap company. Stock was trading in the fall between $200 and $300, got down to about 150 recently, it’s bounced, I think it closed somewhere around 185 today. But Coinbase is is again exactly what I’m referring to. So, in the fall when the stock was trading between 200 and 300, the adjusted EPS estimate for this year was $7. It’s now, that same estimate, is now $3. So the so the multiple’s actually got up. On a GAAP basis because of course like many tech stocks, they add back share base comp, on a GAAP basis, the estimate for this year has gone from $6 in the fall to a loss. We basically think Coinbase is over earning. If you do the numbers, their revenue base is roughly 3% to 4% of their custodian assets, their customer assets. They have a, over $200 billion of customer assets in their system. And if you look at comparable kinds of exchanges or trading operations, and Coinbase is an amalgam of a lot of these because it has different functions. You know, Charles Schwab has revenues of about 25 basis points of client assets. Trading operations, bank trading operations typically have revenues of 1% to 1.5% of assets. And there you have Coinbase at 3% to 4%. So we think that as competition increases in crypto and this is not a call on, on crypto or Bitcoin prices or anything like that, but we think as as competition increases amongst the exchanges, you’re going to see fee compression, and as it is Coinbase will probably not be profitable this year with a $40 billion market cap.
WAPNER: Is there a risk though that, look at times Coinbase has tracked Bitcoin that as Bitcoin recovers assuming it does and gets back to its high or even higher highs, does that put your thesis at all at risk?
CHANOS: Yeah, that’d be, obviously, if it tracks, if it tracks Bitcoin as a sympathy play, it will do that, but what we’re seeing is the economics are starting to diverge. And I think that’s, that’s kind of the important part and, and, and you can easily hedge out the Bitcoin risk if that’s, if you correlate to Bitcoin, you want to take that systematic risk out you can do so.
WAPNER: I mean the other thing this just this week, there are a couple positive research notes I wanted to read to you quickly. Oppenheimer says Coinbase has quote, “Hidden value in the ventures business.” Needham was out today saying the NFT, or this week, said the NFT segment could add more than a billion dollars in revenues. I mean, obviously the street remains fairly optimistic about this one.
CHANOS: Yeah, what are their profit estimates on those reports.
WAPNER: Well I guess that’s the million-dollar, billion-dollar question.
CHANOS: Yeah so we’re back to look we’re back to people trying to get excited about things they got excited about last summer and they certainly have every right and ability to do that. But I think that the problem is, is that this market is so burned people in names that are not profitable, as Jim said at the beginning of your show. We’re looking for companies where the the profit forecasts are continuing to decline as the valuations stay up in the stratosphere. There are plenty of companies that are in the new economy that have real growth, real cash flows with real earnings, but there’s a lot that are just being sold on stories. And we would argue that Coinbase is one that’s being sold on a story.
WAPNER: We’ll make that the last word, and we’ll certainly follow those shares of Coinbase in the weeks ahead, Jim Chanos, thank you for being on in “Overtime.” We’ll see you soon.
CHANOS: Congrats Scott on the new show.
WAPNER: Appreciate it very much. That’s Jim Chanos joining us.
