The bet against Tesla Inc (NASDAQ:TSLA) stock continues to rise in spite of the recent stock rally.
Tesla Inc (NASDAQ:TSLA) stock bounced back on Friday from the post earnings sell-off. Shares of the Palo Alto, California, based electric car maker closed Friday's trading session at $308.35, above its crucial support from the 20-day moving average. Tesla Inc stock had declined by nearly 8% after the company reported wider than expected losses in its first quarter 2017. The company reported a non-GAAP EPS of -$1.33 missing the analysts' EPS estimate of -$0.81 by a massive 64%. The company's reported loss widened from $282.27 million in Q1 last year to $397.18 million in Q1 2017. However, as we have pointed out in our post-earnings coverage on the company, the stock has limited downside in spite of the wider than expected loss due to several factors.
Tesla stock is more impacted by its top line and delivery numbers than its bottom line. The company reported a beat on the top line with 135% YoY growth in revenues. Model 3 is likely to be the key driver of TSLA stock for the next few months. By sticking to its July timeline, the company has given bulls a reason to cheer. "There's plenty of things with uncertainty, but I don't know anything that would prevent us from starting production in July" Tesla CEO Elon Musk said during the Q1 conference call. Also, Tesla stock is currently in a bullish cycle which, to an extent, is driven by hype. Negative news like the slowdown in the auto industry, recall of cars, lawsuits or earnings miss is not likely to impact Tesla shares much for now. It has continued to rally in spite of rising concerns. However, in spite of the current rally and huge losses, bears continue to remain pessimistic about the company.
Shorts raise their bet against Tesla in spite of mounting losses.
Given the near 50% rally in Tesla shares over the past six months, in spite of very expensive valuations and rising risks, shorts continue to bet against Tesla stock. According to a research from S3 Partners, shorts have increased their bets on Tesla stock from $8.7 billion at the start of April to $10.1 billion. This is the largest "short" position in U.S. markets in terms of dollars at risk. In the same period, Tesla shares have soared more than 10% resulting in heavy losses for shorts. According to the research, shorts have racked up around $1.4 billion in losses during this period.
For the year, Tesla shorts have lost more money than combined loss of shorts on the next three most shorted stocks. Tesla shorts have lost around $3.7 billion so far this year. For comparison, short sellers have lost $1.5 billion betting against Apple, $1.1 billion on Amazon.com and $776 million betting against Netflix, according to S3 Partners head of research Ihor Dusaniwsky. As Greenlight Capital's David Einhorn pointed out in his recent letter to shareholders, the company has been the most painful stock for shorts this year. He recently said that investors are currently "hypnotized by Tesla CEO" and are ignoring the risks. According to him, the stock has reached bubble territory. And Einhorn is not alone. Recently Barclays analyst Brian Johnson opined that bulls are blind to the reality that the company faces several significant challenges and are living in a "real life Matrix".
Tesla stock remains expensive.
Tesla stock is currently very expensive if you go by traditional valuation metrics, a fact which is even agreed by most of the bulls and even its CEO Elon Musk. However, most of the Tesla bulls are not much concerned by the traditional valuation metrics as it doesn't take into account Tesla's explosive growth potential. The company plans to increase its annual production from just over 80,000 units last year to 500,000 units by next year and hit the million mark by 2020. It has recently announced plans to launch a new electric car called Model Y. The company is also planning to launch semi-autonomous trucks. During the Q1 earnings call, Musk indicated that Tesla could one day be even more valuable than Apple Inc. Though he did add that he might be completely delusional in saying this and many investors would definitely agree with him.
The market can stay irrational for a very long period of time.
While bulls prescribe high probability of Tesla achieving its stated goal in the very near future, bears continue to remain skeptical. "We're skeptical that the company will be able to mass market its Model 3 at volumes and margins and justify the current valuation" David Einhorn said during a recent conference call. If Tesla indeed misses on its Model 3 target then it will give a much-needed respite to the shorts as a lot of the recent rally in Tesla stock is based on the current production schedule of Model 3.
A disappointment on Model 3 whether in terms of timing, demand or profitability could dent the current bullish narrative around the company. However, a positive news on Model 3 front could send the stock soaring even higher despite the valuation and challenges ahead. Investors who are shorting the stock based on valuations and fundamentals must do well to remember the famous quote from British economist John Maynard Keynes "The market can stay irrational longer than you can stay solvent.".
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