- Jim Chanos: Influential short-seller
- Took on DraftKings, and it tanked
- His latest target: Coinbase
- COIN shares have been in a bearish trend
- A pick-and-shovel crypto play: Short-sellers hated Tesla before it exploded
Short-sellers look to profit from selling shares in companies they believe are overvalued. But rather than own the stock, the short-seller borrows the shares, in hopes they can later purchase them at a lower price.
Short-sellers are a vital part of the stock market, as they use fundamental analysis to uncover value gaps. The value of any asset is a function of what a buyer is willing to pay and at what price point the seller is willing to close the deal. A short-seller focuses on those stocks they believe are at too high levels which don't reflect present or future earnings, revenues and other factors that determine a company’s value.
Some of the most successful short-sellers look to take advantage of periods of rampant speculation that lift a stock's price to unsustainable positions. Cryptocurrencies have been the poster children for speculation. Bitcoin’s rise from five cents in 2010 to nearly $70,000 in mid-November 2021 caused a flood of speculative buying.
Cryptocurrency exchanges are the platforms that facilitate trading and investing in the asset class. Coinbase Global (NASDAQ:COIN) is a leading exchange that exploded to a high of $429.54 per share on its first day of trading in April 2021. At its peak, the Wilmington, Delaware-based company had a market cap of nearly $100 billion.
As of Monday's close, COIN shares were at $201.41, less than half the price at the April 2021 high. The stock is now a target for one of Wall Street's most high-profile short sellers.
Jim Chanos: Influential Short-Seller
Jim Chanos is the founder of Kynikos Associates, an investment fund focused on short selling. Kynikos is Greek for dog-like; in ancient times, cynics were called dogs.
Long before Enron went belly up in 2001, Chanos saw irregularities in its financial statements and shorted the shares. His fund pocketed a profit of more than a half a billion dollars on their short position.
Took On DraftKings And It tanked
In December 2021, Chanos revealed a substantial short position in DraftKings (NASDAQ:DKNG) stock, the Boston-based digital sports betting company. He said of the company:
“DKNG has a valuation right now of 30 times runway revenue. You can believe in sports betting…but this business model is flawed.”
He suggested DKNG could quadruple its revenues without increasing costs and still lose $200 million each quarter, adding:
“That is completely and totally insane.”
Source: Barchart
As the chart shows, DKNG shares dropped from a high of $74.38 in March 2021 to a low of $14.97 on Mar. 15. On Mar. 18, Chanos was still bearish, saying, “things are getting worse there, not better.” DKNG shares were at just above the $18 level at the close on Mar. 28.
Chanos’s Latest Target: Coinbase
Chanos’s most recent favorite short position is in Coinbase, the cryptocurrency exchange.
On Mar. 18, he said:
“Coinbase is what we would call a bubble stock.”
He pointed out that “Coinbase will probably not be profitable this year,” plus, increasing competition in the crypto industry means the company could end up with decreasing earnings.
Coinbase shares debuted on the NASDAQ on Apr. 14, 2021. While the pre-listing reference price was $250 per share, the stock opened at $381 in a speculative frenzy worthy of the cryptocurrency asset class the exchange supports.
The stock moved to a high that gave the company a nearly $100-billion market cap, above the Chicago Mercantile Exchange (NASDAQ:CME) and Intercontinental Exchange (NYSE:ICE), two well-established trading platforms.
COIN Shares Have Been In A Bearish Trend
COIN shares declined from $429.54 on its listing day, Apr.14, 2021, dropping to an all-time low of $150.12 on Mar. 15, 2022.
Source: Barchart
The chart highlights the decline of COIN shares. Chanos believes that it remains overvalued even with a market cap of more than $40.9 billion. He has said his opinion does not reflect on how he views the cryptocurrency asset class overall, but rather is based on likely price compression in the crypto exchanges over the coming years.
He said:
“We basically think Coinbase is overearning…if you look at comparable kinds or exchanges or trading operations.”
Simply put, Chanos is short the stock because he thinks COIN will need to cut its fees, weighing on revenues.
Pick-And-Shovel Crypto Play: Short-Sellers Hated Tesla Before It Exploded
COIN is a pick-and-shovel play on the cryptocurrency market. The company is a bookie, making money on transaction volume, not nominal price levels. However, it will tend to make more money during bull markets that attract speculative activity than during bearish or stagnant periods in the crypto asset class.
Chanos is a successful money manager specializing in shorting shares of overvalued companies. While he has made lots of money in the past, not all of his calls have been correct.
In December 2020, he exited a short position on Tesla (NASDAQ:TSLA) shares, telling CEO Elon Musk, “job well done.” At that time, TSLA shares had moved to a high of $718.72.
Since Chanos abandoned his short position, the stock rose to a high of $1,243.49 in November 2021 and was over $1,091 per share at the close on Mar. 28.
Time will tell if Chanos will be able to notch another victory with COIN, or if he'll wind up throwing in the towel as he did with TSLA. Many market participants follow him, so the potential for a short squeeze in COIN is high.
We witnessed the impact of that phenomenon on the shares of companies like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), perhaps the two most famous 'meme stocks.'
It's likely that COIN shares will be as volatile as cryptocurrencies and the market in which they trade over the coming weeks and months. A high-profile short-seller only enhances the potential for price variance.