Will Tesla Stock Go “Supernova” … Is An Epic Short Squeeze Coming?

JUN 18 2018 BY CARLO OMBELLO 24

Tesla’s next short squeeze: will the stock go “Supernova”?

Discussions about a possible new epic “short squeeze” on Tesla stock are trending these days. The company is going through the most important transition in its young history, as the electric car and energy company strives to achieve mass market production of its more affordable Model 3 and finally reach profitability after years of massive R&D and infrastructure expenditure. As such, Tesla shares have always caught the attention of investors and speculators alike, including record levels of “short selling” (selling borrowed stock in the hope to buy it back cheaper at a later date) that have so far resulted in extreme losses for many. Broadly speaking, the Tesla stock is extremely volatile.

Elon Musk himself has often engaged in the subject, teasing short sellers multiple times. In a famous tweet he recently even alluded at a “next-level short burn of the century”. So how’s the stock doing these days?

Following an all-time high of $389.61 in September last year, shares started a downward trend following issues with early production ramp for the Model 3 and medias’ overly keen attention to Tesla-related accidents and continued quarterly losses. Shorts rejoiced as they called out an imminent collapse of the company. The stock bottomed out at $244.59 a couple of months ago, following the aftermath of Elon Musk’s squabble with analysts during the last quarterly conference call.

Curiously, short interest has since increased to all-time levels, however, the stock has wildly recovered and is currently trading above $350. The eye-watering 45% rebound (at the time of writing) from the recent 52-week low has increased pressure on short sellers, whose strategy is being tested once again. Around 40 million shares are now borrowed, over 30% of the floating stock.

*This article originally appeared on opportunity:energy. Author Carlo Ombello graciously shared it with InsideEVs.

The wildest events of short burn for Tesla stock over the past few years can be easily identified from charts. In recent times, shares more than doubled in about seven months between December 2016 and June 2017, from ~$180 to ~$380 (although the all-time high came later in September). The event defied many analysts’ expectations and left famous shorts burning. Previously, an even more remarkable burn happened when shares increased five-fold from ~$35 to over $190 between March and September 2013 following Tesla’s first-ever quarterly profit in Q1 2013. That was Tesla’s wildest breakout to date and the most painful time for speculative short sellers. What could we expect now if Elon Musk’s latest warnings were to materialize?

There could be endless aspects to consider, but the main focus is of course Model 3 production ramp and associated company’s profitability. There is no denying that Musk’s self-imposed production hell has been a rough ride, however, the delayed ramp has now achieved broadly reassuring levels in the current quarter, seemingly reaching over 3,000 cars per week. The latest updates from Tesla suggest the critical milestone of 5,000 cars per week is within grasp. A figure that was originally targeted by end of 2017, it is only half of Tesla’s long-term production goal for Model 3 but has the crucial consequence, according to Musk, of bringing the company to break-even and profit thereafter. A truly pivotal moment for the company. And for the stock.

Following Q1 2018 results, I forecast Model 3 production levels for 2018 into a chart, with low and high scenarios. Where are we at now? My low scenario implied a production of over 25,000 units for current quarter, the most likely result will be slightly above that given available information, lower levels may cast new doubts but are unlikely. Perhaps Musk will surprise us and reach 30,000? It would mostly depend on final June production.

I suspect anything above 25k level will be seen as a very bullish signal for Model 3 ramp. The other metric will obviously be the weekly production reached by end of June, confidently touted to be on the verge of the fateful 5,000 figure. It’s likely the stock market will read a sustained rate of over 4,000 weekly units into July as an important step. Should 5k actually be reached (say 700 per day?), I believe many shorts would capitulate and start covering en-masse to avoid bloodshed.

Tesla shares have already gained over $80 in the past four weeks, an unprecedented rise in the stock history. All that while short interest stays at an all-time high. Should positive news be confirmed by end of June, short covering could snowball into a growing short burn, with help from bulls quickly focusing on new enhanced price target levels, which would be very arbitrary. I’ll give my own.

Musk’s newly approved compensation package could – over several years – earn him up over $50B (billion!), if he hits 12 market capitalization milestones and 16 revenue or earnings targets. The first market cap step is for Tesla to reach $100B valuation, meaning over $600 a share. That’s a nice new target right there. This would mean a doubling of the stock from recent levels and by no means the worst case scenario for shorts, given previous Tesla short burns and the final target of Musk’s compensation pack: Tesla market cap of $650 billion, a share price of around $4,000. This could be defined as Tesla stock’s ultimate super long-term target, and it’s of little interest for a short-term short squeeze.

VW short squeeze peaked at €1,005 on 23 October 2008.

To understand a next level burn of the century we need an apt comparison: enter Volkswagen. In October 2008 Volkswagen briefly became the world’s biggest company by market value. Following unexpected news about Porsche’s increased stake in the company, short covering reached proper squeeze level, shooting VW shares from a low just above €200 on 19 October to an absolute peak of over €1,000 on 23 October. Once shorts were incinerated, shares quickly fell back to normal levels. This is ultimately what could await Tesla shorts in the near term if positive news comes in fast and in orderly fashion starting June end. I am sure Elon Musk is working on it (and hey, the first Tesla Model 3 Dual Motor Performance has just rolled off the new assembly line!).

So, while a $600 share target could be kept medium term, a short-term “Supernova event” could easily see Tesla break the four-digit barrier. Another five-or-more-fold, yet unsustained, burst in share price is not unimaginable, given the short interest. That’s your next level short burn of the century served. Once complete, shares could then fall back to not-to-crazy levels, and even to new lows, or keep their momentum if next quarters prove Elon right and land him his first compensation award.

Of course, none of this may happen. In any event, enjoy the ride.

Source: opportunity:energy

Categories: Tesla

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24 Comments on "Will Tesla Stock Go “Supernova” … Is An Epic Short Squeeze Coming?"

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Kbm3

If I were a short, I would be getting very, very nervous!

Pushmi-Pullyu

If I had a short investment in TSLA stock I would always be very, very nervous!

The relevant question isn’t “Is a TSLA short squeeze coming”, but rather “When will the next TSLA short squeeze happen?” There have been multiple short squeezes already, and another is entirely inevitable.

ffbj

What’s scary is the market is down 5 days in a row, while Tesla continues to climb. So that is a real big red flag being waved in the face of a bull. Aside from that all the picadors have really enraged it, beyond belief, (anti-Tesla media short stories).
Although now the price is getting a bit too high, (FMV $320) but it could go a lot higher before it goes down, due to all the short interest, and the apparent entrenched shorts, who at some point might have to answer to investors about all the money they have lost shorting Tesla.
I read a story recently where the big Hedge Funds are playing chicken trying to determine when to cover to hurt the other hedge fund the most. So they are holding fire, but they are on fire at the same time. When they start to crumble that will be an epic short squeeze, though it may not come to that, but if it does Tesla $500 is feasible, within a few months.

Gasbag

We’re nearing the point where a bunch of posters will have to change their handles yet again from shame and loss of credibility.

mx9000

I’m not a stock expert, but this chart looks like a short squeeze right now.
Trade volume is DOUBLE the average trading volume.

So, I don’t know how you have people covering, and at the same time the same amount of short interest at play.

Kbm3

I feel like it has to be a major precipitating event. I don’t think a 5k/week verification would do the trick.

Elon knows something we don’t (although it could be confirmation of a previous announcement hiding in plain sight).

Carlo Ombello

I reckon it might be a combination of high Q2 Model 3 produced (30k?), sustained weekly production > 4,000 units and profitability forecasts, alongside some other interesting news such as China gigafactory.

Pushmi-Pullyu

“I feel like it has to be a major precipitating event. I don’t think a 5k/week verification would do the trick.”

You write as if the stock market acts and reacts in a logical fashion. It does not. It’s much more based on emotional reactions, or the sort of following-the-herd cascade reaction seen when a school of fish suddenly changes direction.

If the stock market actually acted in a logical and reasonable fashion, then Tesla’s stock price would be far lower than it is, perhaps only a third as high, and it would be quite rare to ever see anybody “short” any stock.

mx9000

Yes, it’s got to be emotion, when everything a short says is a lie. That’s emotion, not logic.

Are the markets rational? Not in Tesla’s case.
And this is very dangerous for shorts.
Taking an emotional position on a stock is the First Mistake in Playing the market.

Kbm3

Nope. I’m saying I don’t think Elon would assume hitting a production target would trigger a squeeze. I’m making no judgment on the market.

dan

If you’re the star, isn’t going supernova a bad thing? It means that your innards have just been blown out across the galaxy because you could no longer balance the contractionary and expansionary forces.

Carlo Ombello

The star is a mass of short positions in this case… 🙂

gagaga

better to be short via Put Options in this case (as I am), because the danger of a temporary short squeeze is very real.
For my part I am more confident than ever: The model 3 will reach 5.000/week, or even more (no short doubts this), but at increasing losses, as much more workforce is needed as previously planned.

Carlo Ombello

Exactly my thought. If I am so incredibly sure Tesla will fall long term, I would just buy an out-of-the-money PUT and wait. Max downside is the premium paid, not infinity. But real shorts want to manipulate the market by driving the stock down as they bet, by selling. Powerful move, but can kick you in the ass (any morality implications aside).

Kbm3

At least your loss will be limited.

gagaga

If anything is REALLY exploding in front of our eyes, its the losses of Tesla.
The article talks about model3 production rate and stock price movements. It does not even mention the question of profits.

mx9000

The CAPEX spend for the build out of all 3 assembly lines is done or nearly done. That’s the opposite of your “analysis”. What lies ahead are massive profits, unless Musk want’s to build out something else faster. But, he’s said they’re close to reporting profit.

scott franco

Why pity or be annoyed at short sellers? They pay existing Tesla stock holders for the right to borrow the stock, then they have to purchase it again at a higher price, and usually that act itself drives the stock higher (which is the definition of a “squeeze”). Basically they add liquidity and can help the stock drive in a positive direction. They also signal others in the market of impending bad news.

ffbj

I think we are in the midst of one, a short squeeze atm. Nothing about Tesla is typical including the short squeezes.
In this case a lot of shorts are being forced to answer margin calls for you must maintain the % of your short, usually around 40%. So say I shorted 100 shares at $300 then as the stock rises I would have to sell more shares short to reach that 40%, or cover to reduce the number of shares I hold short which is a loss.

In some ways the short slow torture is worse, as at every juncture you may suspect the stock will fall, you short more stock, to maintain your percentage, only to have to buy more as the stock keeps rising, as a response to a margin call from your broker. It’s still a short-squeeze.

walt

Everyone is focused on the “cars”. Mind you, Tesla also has hinted at GigaWatt scale storage projects, soon! and has several projects in the works with U.S / international Utilities. Also, Gigafactory China announcement imminent.

Paul Smith

$5K (refundable) to reserve a spot on a Mars flight in 2025!

Kbm3

Tesla has guided for only 1 GWh energy sales this year. That’s not enough to move the needle.

ffbj

I might add another point in that with peak car in bud, legacy sedans falling by the wayside, and other recent information which is positive for Tesla, such as tariffs, raising duties on cars made anywhere but America, is in the cards, and since Tesla only makes cars in USA, they benefit. I think the percentage of parts is how it’s determined and where it’s put together. Lots of shady areas, like shipping parts to Mexico to have car assembled there, since labor is dirt cheap, and then shipped to the USA.

In addition as the short thesis gets thinner, the dog ate their homework, prospective longs are emboldened. then more bad news from the “Big Stink” which now encompasses all the German car makers, with more bad news, arrests, indictments, investigations, and settlements for all the VW group. Not a good time for them, as they struggle to get their evs into shape to compete, while they can’t sell the public on their diesel garbage anymore.

So bad for everyone else = good for Tesla.