David Einhorn, Greenlight Capital’s fund manager, is a known Tesla skeptic. He recently weighed in on Tesla (TSLA) and CEO Elon Musk in his fund’s investor letter. Musk replied to this letter with a sarcastic public comment posted on Twitter. In this article, we’ll analyze their arguments and see what it all means for the Greenlight Capital fund and TSLA stock.
Einhorn bashed Tesla and Elon Musk in GLRE’s investor letter
Greenlight Capital’s (GLRE) David Einhorn is a long-time Tesla short seller, and he has disparaged the company and CEO Elon Musk several times. While Tesla shorts were comfortably up for the first nine months of the year, the company’s Q3 2019 results took a toll on them.
We explored this topic in Is the Tesla ‘Short Burn’ Musk Predicted Finally Here? After Tesla’s better-than-expected results and outlook, the stock surged and caused shorts to lose $1.4 billion in mark-to-market losses. Notably, Tesla is one of the most shorted stocks in the US, trailing only Apple (AAPL) in this category.
Greenlight Capital suffered losses on Tesla short position
According to a November 1 Bloomberg Quint report, Greenlight Capital lost 6.3% on its hedge funds in October. In comparison, the Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) rose 0.5% and 2.2%, respectively, for the month. The Tesla short contributed significantly to GLRE’s decline during the month.
Einhorn raised credibility concerns
On October 30, Greenlight released its Q3 investor letter, and Einhorn didn’t shy away from chiding Tesla and Musk once again. Einhorn stated that despite its improving sales and increasing share price, “TSLA appears to continue to spin positive PR ahead of the safety and fair treatment of its customers.”
Einhorn recalled another incident in which Tesla was accused of performing a software update to curtail the battery range of older vehicles. Allegedly, this action took place in an effort to avoid the costly recall of defective batteries. Please read Are Tesla’s Safety Concerns Blown Out of Proportion? for more on this topic.
Einhorn on SolarCity acquisition
In his investor letter, Einhorn made the accusation that Musk “knowingly orchestrated a significant fraud by arranging the $2.6 billion acquisition at a time when SolarCity was insolvent.” Citing this and other incidents, Einhorn doubled down by stating, “For now, the accepted reality appears to be that Elon Musk is above the law.”
Musk’s sharply worded response via Twitter
Elon Musk replied to Einhorn’s letter and accusations through a sarcastic letter posted on Twitter. He emphasized that Greenlight Capital’s Q3 investor letter made “numerous false allegations against Tesla.”
Musk noted that Einhorn is doing this to “save face” with its investors. Greenlight Capital highlighted in its investor letter that Tesla and Chemours were major losers for the fund during the third quarter. TSLA stock recovered by 7.8% during the quarter, leading to losses for the fund.
Musk also took a jibe at the performance of Einhorn’s fund during the last few years. GLRE’s assets under management have dropped by almost two-thirds in the past few years. Musk then extended an offer to Einhorn to meet with him “to discuss Tesla and tour our facilities.”
Musk’s invitation to Einhorn to tour TSLA facilities
Musk’s invitation to the noted Tesla short is being hailed as a smart move. Einhorn has a responsibility to the fund’s investors to make an informed investment decision based on the best information available. A visit to the company’s facilities and meeting with Musk could provide further insight into his short thesis.
Meanwhile, Musk has a track record of publicly bashing Tesla short sellers. In April 2018, he tweeted, “Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time.”
Tesla short sellers: Throwing in the towel
After Tesla’s surprisingly strong third quarter, some short sellers backed away from their positions. In Tesla Stock: Are Bears’ Arguments Running Out? we noted that one of Brazil’s largest independent hedge-fund managers, Adam Capital, closed its short position on the stock. On November 4, Bloomberg reported that the fund informed its clients in a note that Tesla’s improving operating efficiency hurt its investment thesis.
Positive developments for Tesla
Apart from its surprise Q3 results, Tesla experienced several other recent positives. On November 6, S&P Global Ratings raised its outlook from “neutral” to “positive” on Tesla’s debt. The rating agency turned positive due to Tesla’s better-than-expected cash flows and debt reduction.
Moreover, Tesla bulls have shown added confidence in the stock after its Q3 results. Ron Baron, Baron Capital’s founder and a long-term Tesla bull, reiterated his bullish view on the company. Baron added that he remains confident about Musk delivering on his promises. He added that Musk believes that everything for the company should come together by June.
Tesla’s surprising Q3 leaves short sellers reeling
Tesla stock has gained 31.6% since the release of its Q3 2019 results on October 23. This has turned the stock positive on a year-to-date basis, with a gain of 0.7%.
Musk highlighted several positives in Tesla’s third-quarter results, including better-than-expected timelines for its projects, including Model Y and China Gigafactory. A well-timed execution of these projects and strong deliveries could help prolong the stock’s positive momentum. This could cause a further short squeeze in the stock, further pressuring Tesla shorts.