Tesla Stock Recent Surge Burns Short Sellers



Tesla (TSLA) stock has touched an all-time high, crossing the famous $420 mark. The stock has been quite volatile this year; it has seen a rollercoaster ride. While it had declined in the first half of the year, it surged sharply in the second half. So, short sellers that cheered earlier in the year are now in the gloom and doom. Their losses climbed to new highs since the rally in the stock started.

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Tesla stock rise leads to huge losses

According to the S3 Partners report, short sellers made a mark-to-market profit of $5.16 billion from January 1 to June 3. During this period, Tesla stock plunged by 46%. However, since June 3, Tesla stock has surged sharply by 126%. This resulted in mark-to-market losses of $7.6 billion. This is a massive blow for short sellers, who had already lost $5.75 billion from 2016 to 2018.

If the stock price rise continues, short sellers who have high risk-bearing capacity could continue to hold on. Others might squeeze out as they hit their risk-limits. The report states, “If the pace pf short covering and price appreciation continues at this pace, we should see shares shorted below 20 million shares as Tesla’s stock price hits $450/share and another $1 billion of mark-to-market losses hits the short seller’s ledgers.”

According to Nasdaq data, short interest in Tesla stock fell from 41 million shares in June to 29 million shares in November.

Short sellers burn fingers in Tesla stock

Popular short sellers in Tesla stock include Greenlight Capital’s David Einhorn and Kynikos Associates’ Jim Chanos. They would have presumably faced losses with such a rise in Tesla stock. Both have been long-time bears in the stock.

According to the Hedgeye report, in November, Chanos stated, “So I will say that Tesla is and remains one of our biggest and our best short positions. I think there was some speculation on social media about that yesterday. So for anybody watching, we’re still bears.”

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Chanos thinks that Tesla stock’s valuation doesn’t seem to be justified. He believes the stock trades at a much higher value than what could be assigned based on valuation multiples, like EV to revenues and EV-to-EBITDA. When he punches Tesla’s numbers in his global auto valuation model, he gets “a stock price that is interestingly worthless. It’s zero.”

He believes the surge in Tesla stock price after earnings is due to Wall Street’s expectations of better profits. In turn, this is based on expected product launches and anticipated margin improvements.

Einhorn attacks Musk directly

Moreover, Einhorn has on several occasions criticized Tesla’s CEO Elon Musk. Einhorn attacked him on issues like the solar roof fire incident, vehicle safety, and self-driving timeline. To learn more, read Tesla Stock Gains Dim Einhorn’s Greenlight.

Recently, Einhorn and Musk were seen attacking each other in a head-on battle. It started with Einhorn taking on Tesla in the Greenlight Capital’s Q3 newsletter. The report stated that Musk puts positive PR ahead of customers’ safety and fair treatment. Also, he accused Musk of committing “significant fraud.”

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Musk replied to the newsletter, saying that Einhorn did this to save face in front of investors. Musk pointed at the losses Einhorn faced due to his short position in Tesla stock. Plus, Musk invited Einhorn to visit his facilities. In reply, Einhorn again raised questions on some of the accounting items in Tesla’s financial statements.

Several analysts have raised questions on Tesla’s accounting policies after its earnings. To learn more, read Tesla’s Accounting Policies: Another Controversy for TSLA.

Some bears turn into bulls

While some short sellers continue to stay bearish on Tesla stock, others have turned into bulls. According to the Bloomberg report, in November, Adam Capital closed its short position on Tesla, citing Tesla’s operational efficiency as the reason. In the latest quarter result, Tesla posted a surprise profit. Also, it reflected its ability to produce electric cars at high rates and deliver them to the markets.

Further, according to the Real Money report, Jim Cramer, who was a long-time bear on TSLA, has now transformed into a bull. He has ten reasons for the change in his stance. This includes earnings, forecast, Tesla’s Gigafactory 3, and more.

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Additionally, Kevin O’Leary, a critic of Tesla stock, changed to a bull. He bought the stock earlier in the year when the share had declined. He bought it as he could see a clear path to profitability, which turned the corner for him. In November, he was excited about the rise in the stock price after earnings. Now, he might be ecstatic with the stock touching record highs. The change in position has undoubtedly paid off for O’Leary!

Bears turning into a bull on Tesla stock is not only this year’s phenomenon. In the previous year, Citron Research, a short on Tesla, had become long. The firm at that time stated, “Tesla will, finally, after 10 years of unprofitable existence, have the ability to prove that it can be a sustainable, highly cash flow generative entity that is no longer reliant on the capital markets.” However, in April this year, the firm seemed frustrated with the company’s communication.

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Tesla stock is surging to new highs in the second half of the year. This is due to the clarity provided by Musk on its future growth trajectory. The ramp-up of Model 3 at Gigafactory 3 in China, start-up of Model Y at Fremont in the US, expected production of Cybertruck, production of Model Y at Gigafactory 4 in Germany, and production of Model Y in China and Model 3 in Europe are the growth drivers for the company over next 4—5 years.

Of these, the ramp-up of Model 3 in Shanghai and the start-up of Model Y in Fremont could boost the company’s earnings in 2020. To learn more about Tesla’s growth spree, read How Is Tesla Stock Positioned for 2020?

There might be hiccups on the way, but the path has been created. Sooner or later, the company will move up on the trajectory. Tesla bears might continue on their hate spree for some more time. But eventually, as they notice a concrete improvement in the company’s financials, they could soften their stand. However, only time will be able to reveal the fate of the short sellers, who are now burning up with the rise in Tesla stock price.


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