Elon Musk will love this: Tesla short sellers lost more than the US airline industry this year
Posted December 4, 2020 9:56 a.m. EST
CNN — The incredible year for Tesla stock has created a bloodbath for those shorting its shares.
According to analysis by S3 Partners, short investors in Tesla— those who placed bets in the market that its shares would lose value — have lost $35 billion on those positions so far this year.
"There's nothing that compares to it that I can remember," said Ihor Dusaniwsky, managing director at S3 and an expert in stock shorting.
To put that loss into context, the US airline industry posted combined net losses of $24.2 billion, excluding special items, through the first nine months of 2020, the worst losses the industry has ever reported.
Tesla short sellers lost $8.5 billion in November alone, as the company's shares climbed 46% in the month. That's more than the $6.7 billion Tesla itself lost in the 11 years from when it first reported results in 2008 to the end of last year.
It must be sweet vindication for Tesla CEO Elon Musk, who has made no secret of his hatred of short sellers.
And Tesla is a stock that investors seem to love or hate.
For all those who believe the company is a paradigm-changing clean energy leader of unlimited potential, there are other investors who believe it is an overhyped niche player soon to be overwhelmed by larger, more established automakers.
That's why there has long been so much short interest in Tesla stock, with those doomsayers currently holding about 6% of total shares. That's much higher than the typical 1% or 2% of short interest in most other large cap companies.
And this was the year that Tesla became one of the largest cap companies in the country. After years of posting losses as it ramped up production of electric cars, the firm started to turn a profit at the end of 2019. And the shares took off, gaining more than 600% year to date. It is now worth roughly as much as the next six most valuable global automakers — Toyota, Volkswagen, Daimler, General Motors, BMW and Honda — combined, despite having only a fraction of the sales of any of those companies.
Why the losses are so big
When investors short a stock, they are promising to sell shares at a future date at a set price. If the stock price goes down, they make money by being able to buy shares at a lower cost than they have pledged to sell them. But if the stock price rises, they lose money. Potentially a lot of money.
The meteoric rise in Tesla shares this year has caused pain unlike anything that has been seen in the market before because so many investors have taken a short position and the company's shares have become so expensive.
Dusaniwsky said many of the shorts have closed out their positions — the number of Tesla shares held by short sellers is down 63% so far this year. But he said many are still unwilling to change their minds, despite the losses.
"You have the shorts with high conviction holding onto their trades," he said.
There are other large cap stocks on which shorts have taken big losses this year as the market came roaring back from the March selloff. But they represent a fraction of the losses that have been suffered on Tesla because there are far fewer investors holding short positions. Shorts second biggest loser is Apple, but those losses totaled $5.8 billion for the year. Amazon is No. 3 with short losses of $5.6 billion.
The combination of Tesla being a very large cap stock with so much short interest staying put despite huge losses is what makes this so unique, Dusaniwsky said.
"This is truly a unicorn short," he said.
Musk himself has questioned whether the stock is worth its current market value.
"I even said the stock was too high. I mean what am I supposed to do?" he said while rolling his eyes during an interview with Mathias Doepfner, CEO of technology and media company Axel Springer, on Tuesday.
Musk also warned his employees in an email this week that if they don't work to control costs and investors begin to doubt forecasts of large profits ahead "our stock will immediately get crushed like a soufflé under a sledgehammer!"
High profile shorts staying put
One of the market's major short investors, Jim Chanos, admitted that he has cut back on the short position he has long held in Tesla, even as he continues to have doubts about the company's long-term prospects.
"We still do have a [short] position," he told Bloomberg this week. "It's been painful, clearly."
And another major short seller, Michael Burry, who became famous as the focus of the book "The Big Short" thanks to his bet against the housing bubble and mortgage-backed securities just ahead of the Great Recession, disclosed in a since deleted tweet that he had taken a short position in Tesla as well.
"So Elon Musk, yes, I'm short Tesla, but some free advice for a good guy ... Seriously, issue 25-50% of your shares at the current ridiculous price. If there are buyers, sell that #TeslaSouffle," the tweet read.
But despite the continued doubts of some shorts, Tesla is winning over other skeptics.
Goldman Sachs upgraded its recommendation on the stock to buy from neutral on Wednesday, and set a 12-month target price of $780, 31% above Thursday's close.
Goldman predicted that despite Tesla's small overall market share, it could become one of the world's largest automakers, selling 15 million cars a year by 2040. For comparison, global leader Volkwagen sold 11 million cars last year.