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Oct 31, 2016

S3 BLACKLIGHT: TSLA Short Interest back above $6b; $500mm in new shorts

Tesla Motors Inc. (TSLA US) unveiled its “solar roof” in a web-streamed event on Friday, which coupled with their recently unveiled Powerwall 2.0 battery system augment SolarCity Corp’s (SCTY US) solar panel system for home electricity generation. The market seems unimpressed with the announcement with the stock trading down.

Also unimpressive was Tesla reporting their second ever profitable quarter ever, the first since 2013. Short sellers realized that if Zero Emission Vehicle Credits were excluded from the GAAP accounting the $0.71 3rd quarter profit would have actually been a $0.18 loss. Short interest is back above $6 billion, with $500 million of new short selling occurring in the last two weeks. At this level, over 20% of Tesla’s market cap is being shorted.

Tesla’s 3rd quarter profit and forecast of a profitable 4th quarter comes at a very opportune time, voting on the Tesla/SolarCity merger is due to happen in less than a month, on November 17th. Elon Musk is looking for a successful launch of his Model 3, whenever that may be, that will not eat up all of his cash. With $1 billion of his $1.8 billion of capex spending due in the 4th quarter and a stock issuance needed to close the SolarCity deal it may be difficult for Tesla to not look towards the capital markets for another cash infusion in 2017. With 3rd quarter cash flow augmented by a multitude of “one-time” items and a push forward of capex spending, Tesla’s cash burn rate may become a serious issue for Musk after the SolarCity merger.

Short sellers still have a way to go before they get close to this year’s short interest record level of $7.4 billion set in March but there is still two weeks left for the short side to lever up their exposure before the merger vote. Tesla stock borrow rates are around the 1% fee today, if short selling demand keeps trending upwards we should see rates move up as well – probably to 2% by the end of next week, higher if the shorts get into overdrive.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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