With the Dow breaking the 20,000 level and the Nasdaq hitting historical highs, Tesla Motors Inc. (TSLA US) has ridden the Trump market rally and is up over 33%, to $254.47, since the end of November 2016. While long shareholders keep buying Tesla stock, short sellers have not only held onto their short positions during this rally but have continued to sell into it. Tesla short interest hit a historical high today, topping $9.4 billion for the first time. Short interest is up $2.6 billion, or 39%, since the end of November indicating an extreme level of short conviction considering the losses being incurred.
Tesla short interest has averaged $7.5 billion since the end of November 2016, rising from $6.8 billion to $9.4 billion today. The average cost to borrow stock over this time period was 2.28% fee, with short sellers paying $27.1 million in financing costs in almost 2 months. More importantly, with Tesla’s stock price increasing from $189.40/share to $254.47/share short sellers incurred just over $2.26 billion of mark to market losses on their daily closing positions. Adding together the short selling financing costs and mark to market P\L short sellers were down 30.4%, or $2.29 billion, in just under two months. This number does not include P\L derived from intraday trading.
With 4th Quarter 2016 earnings set to be reported on February 8th short sellers are hoping that Tesla does not repeat its 3rd quarter EPS beat ($0.14 actual vs. -$1.14 estimated). Early analyst estimates project EPS of -$1.09 versus last year’s -$1.29.
Short sellers have been building their positions based on two general premises – increased competition in all of Tesla’s product lines and higher costs/lower profits in their car sales creating an even greater cash burn rate and therefore a greater need of additional access to the capital markets.
Competition in the electric car market is increasing. Besides existing cars such as the Chevy Bolt, Nissan Leaf and Audi Q6, virtually every car maker, including Porsche, Bentley and Maserati, are planning entries into the electric car segment by 2020. Tesla’s electric car batteries are presently being manufactured by Panasonic and competition is already being felt from LG Chem, Samsung, Bosch, BYD and even Dyson. Car manufacturers are also looking at proprietary battery systems for the new vehicles they are designing.
In the battery storage and electric supercharger segments Samsung, LG Chem, BYD and GE are working on proprietary designs and car makers are banding together in joint ventures to create supercharger corridors in Europe and the U.S. east and west coasts to support their entries into the electric car market.
Elon Musk recently announced his most recent production runs included cars with working autonomous driving systems but most car makers are busy developing their own versions with the 2017 Audi A8 already in production. Non-car makers are also entering the autonomous driving market with Alphabet and Mobileye/Delphi Automotive the most notable existing competitors. Apple recently stated that this is a market segment they would have an interest in as well.
With Tesla already being a negative cash flow business the recent merger with SolarCity added another negative cash flow product line into Elon Musk’s mix. Having taken down $2 billion of funding in May 2016 much more funding may be needed in 2017. Tesla’s rosy 3rd Qtr included a slowdown in Capex spending. With less than $800 million of a projected full year $1.8 billion Capex spend completed, 4th Qtr earnings may be negatively affected with the completed expense load. In addition, the possible loss or decrease of Zero-Emission Vehicle Credits, which added $139 million in 3rd Qtr revenues, may also reduce revenues. And as Tesla’s vehicles leave the showroom and the firm nears 200,000 in total unit sales, their Federal Electric-Vehicle tax credit begins to phase out.
Tesla’s future success hinges on the success of its Model 3, due in late 2017, the productivity of the Gigafactory and synergies within the SolarCity merger. $10 billion worth of short sellers are anxious to see the results.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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