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Aug 17, 2018

S3 Analytics: No Tesla Short Squeeze, Shorts up $1.2 billion since “The Tweet”

Tesla Inc.’s (TSLA) Chairman/CEO/Co-founder Elon Musk New York Times interview has sparked a 9% decline in Tesla’s stock price today. Elon Musk’s tweets and interviews have had a volatile effect on both Tesla long and short shareholders.

On August 7th “The Tweet”, which started the “taking Tesla private” frenzy, added $6.4 billion to Tesla’s market cap and cost short sellers $1.3 billion in mark-to-market losses. Unfortunately for Elon Musk and the scores of Tesla retail and institutional long shareholders, the anticipated short squeeze resulting from Tesla’s march to $420/share never materialized. Since The Tweet, Tesla’s stock price has retreated over -19%, slicing over $12 billion from Tesla’s market cap and generating $2.5 billion in mark-to-market profits for the short sellers who had stayed in their trades.

Tesla continues to be the largest equity short in the U.S. with $11.2 billion of short interest, 33.4 million shares shorted, or 26.20% of its float. Tesla has held the top spot in the U.S., with only a few interruptions since 2016. Worldwide, only Alibaba Group ADR (BABA) with $19.4 billion of short interest and Ping An Insurance (2318 HK) with $11.7 billion of short interest are larger.

While there has been some short covering since The Tweet, Elon Musk was only able to drive away less than 4% of his short sellers. Shorts have only covered 1.3 million shares since Tesla’s original stock price spike, hardly a short squeeze and more likely an exit by shorter term momentum short sellers and fat-trimming by the lesser capitalized long-term short sellers. In actuality, many of the longer-term short sellers have backed up their bets and slightly increased their short exposure over the last week.

Tesla short sellers have had steely conviction in their thesis in the face of $5 billion of mark-to-market losses since 2016. Tesla short interest averaged $6.26 billion in 2016 and shorts were down $866 million in mark-to-market losses for the year.  2017 saw Tesla short interest increase by 50%, averaging $9.42 billion, but losses more than triple to $3.6 billion in mark-to-market losses. 2018 is yet again another losing year for Tesla short sellers but short interest continued to climb, averaging $10.8 billion in the first eight months of 2018. With today’s $1 billion in mark-to-market gains, year-to-date mark-to-market losses have been trimmed to $509 million.

Tesla short sellers are now up $1.2 billion since “The Tweet” and the chances of a near-term large scale short squeeze are minimal. Unless Elon Musk can get more traction in “taking Tesla private” and its stock price reverses course and heads back up to Musk’s $420/shares target, short sellers are under no impetus to cover their positions. With ample stock available to borrow and stock costs easing slightly to below 2.50% fee levels there is more than enough stock to short at a reasonable cost basis. If Tesla’s stock price continues to slide we may see additional shares shorted and total shorts reach the 40 million share levels we saw in May. Tesla’s short interest activity may turn into a binary event, if financing is truly secured and the privatization is likely, Tesla’s stock price should near $420/share and many shorts will be squeezed out due to the another $3.8 billion of mark-to-market losses hitting their bottom line, but if the deal falls through and/or the SEC has issues with Elon Musk’s tweets we’ll see short sellers increasing their short positions as they recoup all or part of their $5 billion of losses they incurred since 2016.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, 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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