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Jul 6, 2017

Tesla Shorts Celebrate 4th of July with $1.4 billion of Mark to Market Profits

Tesla Inc. (TSLA US) hit its year-to-date high of $383.45 on June 23rd and long shareholders in the automaker were giddy with a 79.44% yearly return. Short sellers were not quite as high spirited as they were down $5.4 billion in mark to market year-to-date losses on an average short position of $9.05 billion for a negative 59.5% yearly return.

On Wednesday, Volvo (VOLVB SS) announced that by 2019 all of its cars will have an electric motor that will either work as a hybrid power source in tandem with its standard internal combustion engine or as a stand-alone fully electric vehicle. Volvo will become a major Tesla competitor in the electric car product line with projected sales of 1 million vehicles by 2025. The announcement of a major international car maker encroaching on Tesla’s turf was followed up with a disappointing “Acceptable” crash test rating from the Insurance Institute for Highway Safety today. Tesla responded by downplaying the IIHS rating and referring to its federal NHTSA crash tests which were more “objective and accurate” and proclaimed that their cars were “the safest cars in history” giving the Model S five stars, its highest rating.

Since hitting its year-to-date highs, Tesla’s stock price has gone into reverse – down 18.8% in less than two weeks. Short interest hit a historical high of $10.96 billion on 6/14, but has dropped to $8.9 billion as Tesla’s stock price fell to $311.50 today. Shorts should be shooting off fireworks as they are up $1.39 billion in less than three trading days in this 4th of July week. Short sellers have recouped $2.01 billion of their losses during this two week price slump and are now down “only” $3.38 billion year-to-date.

Tesla’s short interest had declined since mid-June with 1.5 million short shares covered, but we are seeing shorts starting to rebuild their positions with over 400,000 shares shorted this week. As Tesla’s notional short interest exposure dropped along with its stock price, we did not see short sellers actively “topping off” their positions in order to keep their notional exposure stable, rather shorts were content taking their unrealized profits and not adding to their positions. But, as their shrinking exposure nears $9 billion, shorts are beginning to sell shares in order to build their positions to take advantage of Tesla’s recent price weakness.

We should see Tesla’s short interest stabilize in the $9 billion to $10 billion range with increased short selling as Tesla’s price declines. Even when short sellers were down over $5 billion in unrealized losses, there was no rush to exit their positions. Tesla shorts may be one of the only stocks that is totally immune to a price short squeeze, and with ample lendable stock borrow inventory available, there is little chance of a technical stock loan related short squeeze. It seems that we are only in the initial laps of a long term race, only several hours into the 24 hours of Le Mans or Daytona.

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