Apple Inc (AAPL) took over the top spot in the U.S. equity short interest tables in early March but Tesla Inc. (TSLA) has recaptured the leadership position it held for most of the last three years in early April with a $1.9 billion increase, or +21%, in short interest over the past month. Tesla and the FAANG stocks are now six of the top seven most shorted stocks in the U.S. market, with only AT&T (T) crashing the party at number four.
At its core the Tesla trade, both long and short, boils down to a divergence in financing and production expectations. On the financing side a recent downgrade by Moody’s will make future fixed income based capital raises more expensive; continued negative free cash flow may threaten day to day operational liquidity; and the maturation of convertible bonds may be difficult to replace. On the production side, Model 3 production has steadily increased, although still missing first quarter projections and only halfway to meeting Elon Musk’s 5,000 unit weekly target for the end of the second quarter. Long shareholders point to 455,000 Model 3 orders on the books, which will goose Tesla’s cash liquidity once manufacturing becomes more efficient and sustainable. Meeting Model 3 production goals would increase gross margins per vehicle and turn cash flow net positive, which in turn, would minimize the need for additional funding and allow for increased capex spending for gigafactory expansion and product expansion into the higher margin Roadster and Semi-truck vehicles.
Tesla short selling had been declining until early-March, with over 2.9 million shares covered and Tesla’s stock price trading at just below its yearly high of $357.42 set on February 26th. From March 6th to today, short sellers added 11.2 million shares to their short exposure, an increase of 41% as Tesla’s stock price fell 14.5%.
While the decline in Tesla’s stock price naturally spurred short sellers to short into a declining market, it may be that Tesla’s Model 3 production rate played an even larger role. Bloomberg has created a “Tesla Model 3 Tracker” to estimate the number of Model 3’s produced in its California factory based on Vehicle Identification Numbers (VINs) attached to every new car produced and sold in the U.S. For almost three months, Model 3 production rates rarely ticked over the 1,000 units/week level and short interest declined to below 30 million shares shorted. As Model 3 production levels reached the 2,500 unit/week level Tesla short interest began to soar. Both shares shorted and Model 3’s produced rose and fell in tandem for most of 2018.
Every increase in Model 3 production brought hope to Tesla long shareholders that Elon Musk’s long term production goals would be met and Tesla’s stock multiple was valid. For short sellers, meeting interim production goals would just make longer term production failures more devastating. Every time Elon Musk raised the pot, short sellers called his bet. With pot odds now extremely attractive, short sellers have no intention of folding until the final hands are revealed.
Short sellers were down $1.33 billion in mark-to-market losses in January, following a $3.57 billion mark-to-market loss in 2017. But including today’s $107 million profit on Tesla’s 1% decline, shorts have recouped $2.12 billion of their losses, up $794 million in mark-to-market profits for the year. Several years into the trade, short sellers are now betting over $10 billion that Model 3 production will not hit 5,000 units per week by the end of the 2nd quarter.
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Managing Director Predictive Analytics, S3 Partners, LLC
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