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Sep 7, 2018

S3 Analytics: Musk’s Desire to “Burn” Tesla Shorts Goes Up In Smoke

Tesla’s (TSLA) stock price is down over -5% in mid-day trading as a trio of news stories added gasoline to its month long stock price weakness. The after effects of Andrew Left’s (editor of Citron Research) class action lawsuit against Tesla, Inc. and Elon Musk; the belated revelation that Tesla’s chief accounting officer Dave Morton resigned on September 4th; and Elon Musk appearing to smoke pot with comedian Joe Rogan on his late podcast have reinvigorated Tesla short sellers and discouraged Tesla long shareholders.

Andrew Left’s lawsuit claims that Elon Musk’s tweets about taking Tesla private caused the Plaintiff (Andrew Left) and the potential class members of his complaint significant losses and damages as a result of “objectively false tweets in order to “burn” the Company’s short sellers.” An analysis of Exhibit A of Left’s lawsuit which itemizes his Tesla transactions from August 8th through August 17th shows that Andrew Left has lost approximately $2 million in both realized and unrealized losses. Andrew Left’s Tesla trading was profitable for the first two days after Elon Musk’s tweets, but his trades became unprofitable later that week and he subsequently incurred most of his losses on the 17th. Coupled with unrealized losses on his residual long position, Andrew Left’s losses may be growing even larger with Tesla’s recent price weakness.

The recent resignation of chief accounting officer Dave Morton follows a succession of senior level resignations this year including Jim Keller, head of Autopilot hardware engineering; Susan Repo, corporate treasurer and vice president of finance; Jon McNeill, president of global sales and services; and Jason Mendez, director of manufacturing engineering. The departure of so many executives made the already daunting task of ramping up Model 3 production even more arduous.

While recreational marijuana use is legal in California, investors may be unappreciative of the Chairman – CEO – Cofounder of a $45 billion car manufacturing company sharing a blunt and sipping Old Camp whiskey on a popular podcast. Personal text messages lit up Elon Musk’s phone during the podcast asking him “what are you doing smoking weed?”

Tesla is no longer the most shorted U.S. equity in dollar terms, supplanted by two of the FAANG stocks over the last several weeks as Tesla short sellers covered some of their exposure and Tesla’s stock price declined. Tesla shares shorted are down 2.1 million shares, or -6%, since The Tweet as Tesla’s stock price has declined by 22.3%. Over the last week, Tesla short sellers have started increasing their positions slightly, up 205k shares as Tesla’s stock price slid over 12%.

The decline in Tesla’s short interest has not been a short squeeze as it coincides with a drop and not a rise in Tesla’s stock price. Short sellers had been trimming some of their positions to lock in recent unrealized gains.

Tesla short sellers have been in the red for most of 2018, but this week they’ve turned profitable. Shorts are up $510 million in mark-to-market profits today on Tesla’s 5.2% price drop bringing year-to-date P\L to a $737 million profit, or +6.89%. Since August 7th, when shorts were down $1.3 billion in post-tweet mark-to-market losses, shorts made back $3.7 billion in profits on Tesla’s 22.5% price slide. Their total post-Tweet P/L is now $2.4 billion, or +22.39%.

Tesla short interest reached a new high of $14 billion in mid-June and has declined by over a third in less than three months. We’ve seen renewed short activity over the last week and additional short selling on today’s news and price move. Elon Musk and Tesla’s board will have to make a decision soon as to whether or not to make changes to its C-Suite. Would changes push its stock price up and compel short sellers to cover some of their short exposure and realize their short-term profits, or further weaken Tesla’s stock price and entice short sellers to rebuild their positions in order to recoup their previous year’s losses?  Tesla short interest may decline to $5 billion or increase to $15 billion – its board’s actions or inactions will be the driving force.

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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