'It's happening right in front of your eyes': Legendary short-seller Jim Chanos warns Uber and Lyft investors over creative accounting tricks he says are juicing earnings
- Jim Chanos, legendary short seller and founder of Kynikos Associates, made a name for himself by sniffing out companies engaged in fraudulent activities and malpractice.
- He provides Uber and Lyft as examples of businesses he sees as engaged in misleading accounting practices today.
- Chanos says these companies are adding share-based compensation back into their earnings, and thus creating a deceptive and unrealistic view of their finances.
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Jim Chanos, legendary short seller and founder Kynikos Associates, is known on Wall Street for his uncanny ability to spot frauds, Ponzi schemes, and accounting illusions.
"There is a dark side to business," he said on the "Infinite Loops" podcast, an investing podcast. "And there are times when it's worse than other times."
Chanos says that the fraud cycle follows the business and financial cycle with a lag - and is quick to demonstrate his thinking behind the thesis.
"The longer you go into an expansion and/or bull market the more peoples' sense of disbelief is reduced. You begin to believe things that are too good to be true - and this is a very fertile field for management," he said. "In addition, becomes more and more difficult for managements to meet ambitious goals that they've set, and so lines get crossed."
If Chanos' description of periods when an increase in fraud is likely is starting to sound eerily familiar, that's because we're currently in a very similar market environment.
Chanos says that it's usually not until the business and financial cycle starts to sour that the "revelations" occur. Investors that were once gleefully pumping their money into these companies and ventures are now looking to get their money back - and that's when things start to unwind.
"Most frauds today tend to be accounting and/or Ponzi schemes," he said. "People always ask me: 'Where are you seeing instances of actual wrongdoing today? I mean, yes, things are expensive, but is there really fraud going on?'"
He continued: "My favorite are some of the ride sharing companies."
According to Chanos, the "heavy, heavy use of pro-forma accounting and management derived metrics" are skewing the financial results of Uber and Lyft in a deceptive manner.
To Chanos, it all comes down to how they're conveying their numbers.
"For example, if you look at the ride sharing companies - Lyft and Uber - they will tell you that they're actually going to be profitable faster than we thought on an adjusted EBITDA basis, pro forma, blah blah blah blah blah, " he said. "It's not until you realize that they're using massive share-based compensation in paying their employees - and they're adding that back into their adjusted EBITDA basis."
In layman's terms, Chanos' gripe with Uber and Lyft is that they're issuing billions of dollars worth of stock, and saying that they're cash flow positive. Needless to say, this doesn't make sense to him.
"That's one easy, easy pro forma that I think we should abolish immediately, except it would devastate some of the metrics the Silicon Valley companies are valued on, because a lot of them are valued on these pro forma numbers that disregard actual compensation expenses," he concluded. "It's happening right in front of your eyes."
Axel Springer, Insider Inc.'s parent company, is an investor in Uber.