With all the data that has been piling up over the past few months, it is surprising that Tesla Motors (TSLA) still has almost 50% short interest. Six months or a year ago, shorting TSLA was certainly worth considering, but there are is so much compellingly positive data that the short-interest is just baffling (although levels have receded about 8% in the last two weeks of December). So why would anyone have gone short in the first place? Why are they still? What could short positions still be counting on?
data by YCharts
TSLA has been a risky venture from the start, even ten years ago as a private enterprise. The idea of electric cars is not a new one, it has failed and/or been abandoned many times before. Some of the first cars ever designed were electric, but they were deemed inferior or less practical to the combustion engine driven auto markets of the last hundred years. So the thought that an electric car company could survive today, when perhaps America's most beloved industry of all-time barely bats an eye at electric cars, is a brazen undertaking. As a public company, TSLA could reasonably have been viewed as a candidate for short positions at just about any time since its IPO, until recently. Throughout its public history TSLA has tended to be volatile and overvalued. As recently as the third quarter of 2012, TSLA probably dipped into negative book value (its liabilities outweighed its assets) while somehow still maintaining a nearly four billion-dollar valuation and a stock price that has doubled at times since the IPO.
Being highly overvalued, and coupled by a historically slim margin for success made TSLA look like a prime candidate for failure and consequent short positions. Even more indicative of failure, TSLA almost started its industrial engine with only fumes left in the tank. TSLA has been in the process of "ramping" production for about six months since the summer of 2012, largely missing its initial targets. Unable to deliver cars and record sales as planned, TSLA was low on cash just as they were beginning earnest production, which regardless of stock price is a dicey way for any company to execute its business model. It would have been terrible to see so much work and what is a very good product go to waste, but those with short positions would have almost surely made big gains. TSLA had even been using reservation deposits as unrestricted cash, which was properly disclosed to potential customers, but not exactly ideal business practice. To strengthen its margin for error, TSLA did a follow-on offering toward the end of the third quarter 2012, and raised about $222 million. In addition to its $85 million in cash, the follow-on provided more than enough capital to carry TSLA until meaningful sales revenue could be accrued in Q4 and beyond.
In addition to the above weaknesses, TSLA stock is also subject to the same bigger picture issues as most stocks, such as the Fiscal Cliff and debt ceiling/national debt ambiguity. Moreover there was speculation that TSLA would be unable to competently do production on a large scale, that it would default on what are now controversial federal loans, and that it would not be able to generate enough demand. Additionally as with any manufacturer, a catastrophic need for recall could still arise at any time and make a serious if not permanent wound to TSLA and its shareholders. In many ways, TSLA appeared to be the perfect short even as recently as a few months ago. It is more than reasonable to see why TSLA's short interest has consistently been one of the highest on the NASDAQ. But over the past few months, positive data has been piling up, leaving short positions with very little of the above arguments to serve as justification.
Not long ago, short positions were looking reasonable, even smart; but they do not have much to rely on for now. Of the above discussion, there are only two elements that still support the short case, and they are both long shots at this point in time. In the future, shorting TSLA might sound like a good idea again, but over the past few months TSLA has reached many milestones and there are very few reasons not to be optimistic. According to numerous sources such as interviews and tweets from TSLA executives, and first hand data from customers, TSLA is still quite comfortable with demand, supply, and cash. The fourth quarter earnings call, which normally takes place in mid-February, should affirm expectations and probably have some pleasant surprises for investors. In the meantime short positions will need either a major recall and/or a major macro-economic downturn to initiate any major decline in the stock price. Bi-monthly short interest tallies, which NASDAQ is scheduled to publish on January 25 and February 11, will provide some insight as to how those with short positions have been absorbing the data.
Disclosure: I am long TSLA.