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Feb 7, 2017

S3 BLACKLIGHT: Tesla Short Sellers Lose $2.3 billion since November, Short Interest at Record High

With the Dow breaking the 20,000 level and the Nasdaq hitting historical highs, Tesla Inc. (TSLA US) has ridden the Trump market rally and is up over 34%, to $255.77, since the beginning of November 2016. While long shareholders keep buying Tesla stock, short sellers have not only held onto their short positions during this rally, but have continued to sell into it. Tesla short interest hit historical highs, topping $9.0 billion for the first time this month and is at $9.2 billion today. Short interest is up $3.4 billion, or 62%, since the beginning of November indicating an extreme level of short conviction considering the losses being incurred.

Tesla short interest has averaged $7.3 billion since the beginning of November 2016, rising from $6.8 billion to $9.2 billion today. The average cost to borrow stock over this time period was 2.15% fee, with short sellers paying $43.1 million in financing costs in just over three months. More importantly, with Tesla’s stock price increasing from $190.79/share to $255.77/share short sellers incurred just over $2.3 billion of mark to market losses on their daily closing positions. Adding together the short selling financing costs and mark to market P\L short sellers were down 31%, or $2.27 billion, in just over three months. This number does not include P\L derived from intraday trading.

With 4th Qtr 2016 earnings set to be reported on February 8th short sellers are hoping that Tesla does not repeat its 3rd quarter EPS beat ($0.14 actual vs. -$1.14 estimated). Early analyst estimates project EPS of -$1.09 versus last year’s -$1.29.

Short sellers have been building their positions based on two general premises – increased competition in all of Tesla’s product lines and higher costs/lower profits in their car sales creating an even greater cash burn rate and therefore a greater need of additional access to the capital markets.

Competition in the electric car market is increasing. Besides existing cars such as the Chevy Bolt, Nissan Leaf and Audi Q6, virtually every car maker, including Porsche, Bentley and Maserati, are planning entries into the electric car segment by 2020. Tesla’s electric car batteries are presently being manufactured by Panasonic and competition is already being felt from LG Chem, Samsung, Bosch, BYD and even Dyson. Car manufacturers are also looking at proprietary battery systems for the new vehicles they are designing.

In the battery storage and electric supercharger segments Samsung, LG Chem, BYD and GE are working on proprietary designs and car makers are banding together in joint ventures to create supercharger corridors in Europe and the U.S. east and west coasts to support their entries into the electric car market.

Elon Musk recently announced his most recent production runs included cars with working autonomous driving systems, but most car makers are busy developing their own versions with the 2017 Audi A8 already in production. Non-car makers are also entering the autonomous driving market with Alphabet and Mobileye/Delphi Automotive the most notable existing competitors. Apple recently stated that this is a market segment they would have an interest in as well.

With Tesla already being a negative cash flow business, the recent merger with SolarCity added another negative cash flow product line into Elon Musk’s mix. Having taken down $2 billion of funding in May 2016 much more funding may be needed in 2017. Tesla’s rosy 3rd Qtr included a slowdown in Capex spending. With less than $800 million of a projected full year $1.8 billion Capex spend completed, 4th Qtr earnings may be negatively affected by the completed expense load. In addition, the possible loss or decrease of Zero-Emission Vehicle Credits, which added $139 million in 3rd Qtr revenues, may also reduce revenues. And as Tesla’s vehicles leave the showroom and the firm nears 200,000 in total unit sales, their Federal Electric-Vehicle tax credit begins to phase out.
Tesla’s future success hinges on the success of its Model 3, due in late 2017, the productivity of the Gigafactory and synergies within the SolarCity merger. Over $9 billion worth of short sellers are anxious to see the results. Having spent over $40 million financing their shorts for the last three months and incurring almost $2.3 billion in mark to market losses these short sellers have extremely strong conviction coming into Tesla’s earnings. If shorts continue to enter this trade, stock borrow rates and financing costs will start to climb. Tesla total daily financing costs are around $550k/day, but back in September 2016 when rates were in the upper 20’s%, total Tesla financing costs were up to $4.5 million per day.  Having weathered over $2.3 billion of losses in three months, it might take a large price move to squeeze out these shorts, but if they begin to cover their positions there would be several billion dollars of buy to covers hitting the tape providing quite a tailwind to Tesla’s stock price.
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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