Short interest in Tesla has been flaming out all month. Down from a peak of 26% of total interest, the bears stood at just 19% ahead of the earnings report this week.
A Wall Street feeding frenzy has descended upon Tesla (NASDAQ: TSLA) stock after its most recent earnings report. Twitter is alive with Elon Musk fans gloating about just how much money they have made, and rubbing it in the face of the naysayers. An explosive 12% rally to $650 has annihilated already wounded short-sellers, but these belligerent bears aren’t as foolish as they look.
Short interest in Tesla has been flaming out all month. Down from a peak of 26% of total interest, the bears stood at just 19% ahead of the earnings report this week. On the sidelines, it’s hard to see why these bearish traders continue to load up against TSLA only to see the stock smash them once again.
In reality, the downside for Tesla stock is quite apparent to a level headed investor. A highly leveraged company, operating at full tilt with massing opposition can’t begin to justify its valuation when you take apart the nuts and bolts of its finances.
Or, in an equally popular scenario, TSLA lives long and prospers in the positive risk environment, and Wall Street continues to pay a hefty premium for the growth opportunity.
Trading is as much about perception as it is about reality, and the latter scenario is currently the more popular story-line. Throw in the short-burn and the result is a parabolic price spike.
Failing to understand this fact is what has made bears such easy prey. Conventional EBITDA valuations are one thing, but you can’t fight the music. Short demand for Tesla stock is so intense because if/when things head south, there is a multi-billion dollar debt load on the books.
The biggest mistake that bears have made is to misunderstand the animal spirits that are in control of Tesla. It might make rational sense that TSLA can’t keep going up, but you have to wait for something to break the spell.
By continually selling the peaks, bears have run into a buzzsaw of positive news, highlighted by the latest profitable earnings report. Rather than waiting to pile in on a trend-change, shorts are hoping to get the whole pie and not just wait for a slice.
On Tesla’s earnings call with Elon Musk and other executives, multiple questions from institutional investors with concerns about op-ex (operating expenditure) were seen. At one point Musk admitted,
We are spending money as fast as we can spend it (in sensible ways).
This sort of line won’t be particularly reassuring to classical Warren Buffett-style investors that make up a lot of long-only funds around the world.
Despite what you read on Twitter, Tesla has made mistakes (as executives acknowledged in the call), and Musk and his team are fully aware of the dangers that come with such massive growth.
So if well documented cash flow concerns aren’t a worry for TSLA bulls, what else could cause the rally to reverse? Other than bullish momentum fading on profit taking, a more obvious concern for Tesla stock has to be the coronavirus outbreak in China.
The following statement was made in the earnings call, referencing problems that the new Shanghai giga-factory is running into as a result of the epidemic:
The Shanghai factory will see a 1 to 1½ week production delay because of a government-mandated shutdown. This will likely impact profitability and also possibly the supply chain in Fremont, though the extent of this is not yet clear.
Understanding this, there is an obvious opportunity for the bears. If the coronavirus issue worsens, there will be strong evidence that some of the good news currently priced into TSLA will need to be unwound
If production underperforms, the shorts will have the upper hand and can flush the over-enthusiastic retail bulls out of the market quite quickly. If China does bring the epidemic under control rapidly, things could equally take off again as a major concern is removed from the market-place.
So next time you see a Tesla bear on Twitter, don’t treat him too harshly. They aren’t stupid, they’re just greedy.
Last modified: September 23, 2020 1:32 PM