While Musk has been warning against shorting Tesla for years, he’s never been as determined as over the past few months, starting in May (see above tweets), when he quoted reports from S3 Partners showing progressively low supply of stock for shorts to cover, and hinted at an event bigger than VW’s 2008 short squeeze, something I would picture as a financial “Supernova”. All of these warnings, including a following June tweet giving three weeks to shorts — Elon time — before their position would “explode,” have come at a time when the carmaker has successfully ramped up production of its more affordable Model 3, a car now on the verge of becoming the best selling EV in the world. Tesla has also made substantial efforts to turn to profitability. We already know that since Q2, despite an average weekly production rate of just over 2,000 cars per week during that period, Model 3 has already turned to slightly positive margins. Tesla is now guiding over 50,000 units in Q3 (or an average of about 4,000 Model 3s per week) with a 15% gross margin for the Model 3. Musk clarified that, in the absence of external “force majeure” events, the intention is to become profitable from Q3 onwards every quarter, with Model 3 margins increasing to 25% over another six months.
Recent upbeat news on production progress and looming profitability have already helped Tesla stock head higher. This week’s tweets have then set the stage for something much clearer. Musk has now set a minimum threshold for a possible short squeeze at $420. Should the next few days pass without feedback on the plan, Musk will seriously expose himself to severe consequences over his words. Should we instead see confirmation of Elon’s intentions and formal backing from Tesla board, possibly with identified investors for a private plan, shorts will be in for a nasty surprise.
Is it so difficult to fund Musk’s proposal? While certainly unprecedented in its size, this financial operation is not as far-fetched as many are trumpeting. A very good Seeking Alpha article on the subject, “Tesla: How Much Cash Should It Realistically Secure?” (ironic source, I know), elaborates on how such a plan could easily find appropriate financial backing. It’s estimated some $30 billion or less on the line, none of which from the usual banksters. This summary is remarkably similar to the one in a CleanTechnica article by Maarten Vinkhuyzen, “How Musk Could Fund Taking Tesla Private.” Vinkhuyzen separately showed how $0 to $29 billion could suffice, and with plenty of potentially interested parties.
Then what? If Elon Musk has engineered a similar or better deal, Tesla stockholders will know they have an assured value of $420 per share, which is the price the stock will quickly align to as the plan is confirmed. A minimum loss threshold for shorts. As many will hold onto their shares, availability on the market will plummet, while shorts finally scramble to cover 35 million borrowed shares (~25% of the total), bidding for unavailable stock.
What happens next is a wild guess, Elon clearly stated this would be bigger than VW’s famous short squeeze in 2008, which saw shares quintuple in value over a few days (from €200 to €1000). In that case, just 12.8% of the stock was borrowed and needed cover, but that still left some hedge funds obliterated before the stock retraced. So, if Musk has genuinely designed a plan for the squeeze of the century, we may be about to experience a once-in-a-lifetime, astronomical event of epic proportions.
Wanna know someone who got burnt with VW? David Einhorn of hedge fund Greenlight Capital, who has just received a box of short shorts from Elon Musk (er, actually, from real-shorts seller Chubbies). The irony!
