Tesla Shorts Refuse To Cover Despite Suffering Massive Losses

Tesla shares rocketed higher on August 2, by almost $50, the day after the company reported its second-quarter results. Despite the stock rising more than 15% immediately after the report, WSJ analytics  showed that short sellers are standing their ground in the name despite an estimated $1.7 billion paper loss resulting from the violent move higher.

The Journal noted that there was about $10.5 billion in short interest heading into Wednesday afternoon’s reported earnings. And as the above chart shows, Tesla has remained the most heavily shorted stock in the U.S. in the days after its report. It was also noted that dating back to 2016, shorts in the name are down over $6 billion, making it third only to Nvidia and Amazon as the most painful short over that time period. 

The WSJ quotes one of Tesla’s most vocal and well known short sellers, Mark Speigel, who, despite noting that Tesla has pulled down his hedge fund’s performance, stated that he plans to keep this short on because nothing new in the second quarter report disproved his thesis. 

“It’s pounded my fund’s performance over the last 18 months…but I don’t let the stock price change how I feel about the company,” said Mark Spiegel, who says his hedge fund, Stanphyl Capital, has been shorting Tesla for years and would continue to do so for the foreseeable future.

Mr. Spiegel said he first began shorting Tesla around 2013, when its share price was trading in the high $90s. Once it got to around $200, “I thought, this is beyond ridiculous, and that’s when I got a lot shorter,” he said.

Wednesday’s earnings report did little to impress Mr. Spiegel, who said he is troubled by competition from luxury auto makers that plan to roll out their own electric vehicles and issues with product delays, along with the pace at which the company has plowed through its cash. “I saw nothing in [Wednesday’s] report that I didn’t expect or that changes my opinion about the company,” Mr. Spiegel said.

Not surprisingly, Tesla bulls used the earnings report in which Musk “apologized” to add to their positions. Gerber Kawasaki’s Ross Gerber took to Twitter on Friday, even after the stock ran up nearly $50 on Thursday, to try and “put the screws on the shorts” by buying more stock.

Even so, the head of predictive analytics at S3 Partners told the Journal that he expects shorts to continue to hold their ground moving forward:

While it is possible short sellers with narrower time horizons are waiting for Tesla’s stock to pare recent gains before closing out their positions, longer-term sellers have accumulated losses of billions of dollars in the past—and in response, not just held onto their positions but also expanded them, Mr. Dusaniwsky said.

“The ones who’ve lost billions of dollars, they’re going to take it on the chin,” Mr. Dusaniwsky said, adding that Tesla has been one of the most heavily shorted stocks in the U.S. for years. “No matter what is going on with the price and with earnings and car production, the major long-term short sellers are holding onto their short positions.”

Other analysts tried to provide a more balanced look at what the company did well in Q2, the fact that Elon Musk behaved himself and the company did not disclose a Wells Notice – with what the company did poorly – basically everything having to do with managing the company’s financials and balance sheet.

The Wall Street Journal article noted that the company’s precarious financial situation remains the biggest reason that many short sellers, like David Einhorn’s Greenlight Capital, have not given up their position on the company.

Hedge fund Greenlight Capital Inc.’s short position in Tesla, whose shares jumped 29% last quarter, was its second-biggest loser throughout that period, according to a letter the firm’s president, David Einhorn, distributed to investors this week. Still, in his letter, Mr. Einhorn maintained that 2019 would likely be “a very challenging year” for Tesla, adding that he doubted “the entry-level Model 3 will be produced profitably anytime soon, if ever.”

Prior to earnings, we wrote that Tesla short sellers likely stood to gain or lose about $850M as a result of the report. 

Based on the price of weekly Tesla options contracts that were set to expire the following Friday, traders in the options market expected the shares to swing by about 8% after the company reported results.

In the end, shares popped 15% on the report, doubling the max pain for shorts.

Regardless, it looks as though the next two quarters are going to be extremely interesting for Tesla, which has stuck with its controversial forecast that it will be GAAP profitable in the second half of the year. Short sellers have pointed out that the company’s cash minus customer deposits has dropped precipitously to just $1.2B and that payables rose from $2.6B to $3.0B over just one quarter, indicating that the company may be trying to free up cash by not paying its bills; a strategy that can’t last forever and will likely keep Tesla shorts hanging on. Meanwhile, even the most neutral of observers are confident that Tesla will need to raise billions in new cash to fund its staggering backlog of R&D, projects, ideas, new facilities and just to keep the cash burning business running.

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