Editor’s note: A good fellow over on the Tesla Motors Club (TMC) forum recently tagged me in a thread about TSLA trading after I broke news of an insane uptick in TSLA shorting. I started following the discussion and found it and the overall story fascinating, so I asked the fellows there if any of them would like to submit a guest article on this topic to CleanTechnica for our consideration. A Peter Forman sent over a really interesting piece, so we’re publishing it below.
Aside from Peters’s great piece, there were a couple of comments from others on short shares that I feel really help to explain what’s going on here, so I’m adding them to the bottom of this post. I was also reminded of an epic two-part series Steve Bakker wrote for us here on CleanTechnica last year, titled “How I Learned To Stop Worrying About My Tesla Shares & Love The Short Sellers.” Please do go check out both parts one and two for some fun and education. And thanks to Peter, Steve, and others for contributing thoughtful, useful pieces and comments on this. — Zachary Shahan
By Peter Forman
The official numbers are now in and more than 38 million shares of Tesla (Nasdaq: TSLA) were in the hands of short sellers as of April 13, 2018. That’s a whopping 10 million shares picked up by shorts in just one month’s time and a strong indication that TSLA short interest topped 40 million shares later in the month. To put the numbers in perspective, TSLA shares held by shorts during the past 12 months have previously ranged from 27 million shares to a bit over 31 million. Even with those lower numbers, TSLA managed to sometimes hold the title of the most shorted stock in the USA! Above 38 million shares, though, that means that more than 30% of Tesla’s tradable shares are in the hands of entities that are betting the stock will lose value. The track record of those who bet against Elon Musk is not good, particularly when the number of shares sold short reaches such epic heights.
Back in November of 2016, TSLA short interest topped 36 million shares as shorts bet heavily that a proposed acquisition of SolarCity would send the stock price plummeting. The selling pressure took its toll initially on TSLA, which traded as low as $181 that month, but by June of 2017, TSLA climbed to over $380, leading to billions of dollars of losses to Tesla’s short sellers in 2017. Now the battleground has moved to the production ramp-up of Tesla’s Model 3 sedan. Shorts believe that the ramp will either not reach desired quantities this year or that Tesla’s newest vehicle will fail to carry the company to profitability even if a sufficient quantity are built. If they bet wrong on Model 3, however, losses to the shorts could easily eclipse the carnage experienced in 2017.
Tesla bulls will tell you there’s good reason to believe that Tesla will in fact successfully ramp Model 3 after a slow start. The bottleneck, according to Musk in a recent CBS interview, continues to be the number of battery modules coming out of Tesla’s Gigafactory in Nevada. With Tesla’s Fremont vehicle factory turning out over 2,000 Model 3s per week for the 3 weeks preceding a recent production pause, we know the low end of the factory’s production numbers but not the high end (since battery modules are the bottleneck). That restriction is about to go away, however, as a carefully tested module assembly process created by Tesla’s German engineering company, Grohmann, is being installed in the Gigafactory and will soon more than double the output of modules packed with Tesla’s most advanced automotive battery cells.
In many ways, the battle between Tesla’s supporters and detractors has become far more than just a matter of placing bets. When shorts take possession of millions of shares of Tesla’s stock, the downward pressure on the stock price is immense, and no doubt some shorts are in their positions to intentionally deflate the stock price and thereby make equity offerings by Tesla to raise money more difficult and more expensive. In June of 2017, Elon Musk tweeted, “These guys want us to die so bad they can taste it.” Fortunately, for the company and its investors, when Tesla does indeed show that the Model 3 ramp is progressing on target and likely to produce profits for the company later in 2018, the “tightly coiled spring” of having 40 million shares sold short will result in huge quantities of buying in order to cover short positions, and such covering will send TSLA rocketing upward.
The company’s first-quarter earnings report on May 2 may well be the moment of truth when the success of Tesla’s Model 3 ramp becomes known. Both bulls and bears agree that the financial numbers will be ugly in the report, but bulls suggest that if Musk reiterates expectations of company profits in the 3rd and 4th quarters of 2018 and lays out sufficient evidence that the Model 3 ramp will make it all possible, then the 1st quarter financial numbers will be overshadowed by Tesla’s bright future. Until then, the two sides are counting the days until the earnings report and trying to read the tea leaves to determine which side will prevail.
Peter Forman is a writer and innovator who began buying Tesla’s stock at $28 a share and has never looked back. This former airline pilot and college professor has a passion for applying new technologies to education. More recently, he has focused on understanding the trajectory of today’s clean energy revolution. He drives a Tesla and powers 100% of his house and vehicle’s energy needs through rooftop solar panels.
In response to the question “Is there any chance that some shorts will default and cause longs not to get their shares back?,” TMC user Johan answered in a way that further explained shorting and the “short squeeze” phenomenon:
This is not possible, the market maker would be left holding the bag — since blatant naked short selling (taking up a short position without securing it with the broker) is illegal. This is also one of the mechanics behind a short squeeze: if someone takes up a short position and the stock price keeps rising, they will be gradually forced by their broker to secure their potential loss either through having more and more cash in their account or through giving the lender some other security, which in reality often is that the broker is allowed to liquidate other positions you may be holding to cover your short. The process by which the increased stock prices thus forces the holder of the short position to add more and more security in order to keep holding the position is the actual “squeezing.” This also goes for opening short position option trades (selling calls or buying puts).
Going even further, adiggs notes:
… the 41M shares shorted become “new” shares in the market that are owned by somebody. So 170M Tesla shares with another 40M short means there are holders of 210M Tesla shares in the market. In a sense, when you establish a short position, you are manufacturing new shares of the company, and as the manufacturer of the shares, you are responsible for satisfying them on demand.
That means at the end, you have 119M shares left with 40M shorted — better looking than your conclusion, and if I were thinking about shorting the company, a ratio that would still freak me out. At the limit, the people that are short need to acquire 1/3rd
(instead of 1/2) of all of the trading shares of the company on demand.