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The only answer I can think of for why those short Tesla (NASDAQ:TSLA) have not covered yet is that they are hedged shorts using a Long-Short strategy.

Valuation at $18

Tesla has been heavily shorted since around $18-20. At this point, success wasn't a certainty. There were many who thought Tesla would either run out of cash or fail to produce on their multitude of promises they had made. When a company that has never produced a product from scratch before states they will build a factory, make their first car produced Car of the Year, and create the safest car ever made, there are quite a few reasons for doubt.

Value of Total Assets and Risk of Bankruptcy in 2011

In late 2011, Tesla's factory alone was likely worth 200-500 million, and the Model S platform could have been worth 500 million to 1 billion. I suspect that at $18 per share (a 2 billion market cap), the market was pricing in either a buyout or bankruptcy.

If Tesla went bankrupt, there would likely have been a fire sale on their holdings. After paying off their debt, they would have had minimal equity left for common shareholders and the stock would have probably fallen to 0. An intelligent hedge fund would see this as a possibility and would want to try to create a minimal risk scenario.

Who is shorting Tesla?

The persistence of Tesla shorts has me believing that a lot of institutional holders went short the stock and long Tesla with calls when the market cap was 2 Billion. If a hedge fund wanted to invest in Tesla at $18, they would be crazy to only buy the stock outright, or to only buy the calls. Retail investors typically don't short, making it incredible unlikely that the high short interest is due to a group of Electric Car pessimists deciding to voice their opinion by shorting Tesla. Mutual Funds in most cases aren't permitted to short, making it incredibly unlikely they are doing so.

If Tesla succeeded and sold 20k cars with an ASP of 75k in 2013, they would be taking in 1.5 billion in revenue.

With CEO Elon Musk's guidance of 25% Gross Margins Tesla would Gross 375 million in Profit. If we include 10k in profit from ZEV credits for each Model S sold, and the 100 million from the sale of power trains, they would gross 675 million in profit. If Tesla's annual expenses were consistent with 2012, at around 400 million, Tesla would net approximately 275 million in profit.

When Tesla's market cap was 1.5 billion, it was not priced for 275 million in profit, and there was huge room for upside. The options Elon Musk was granted, only vest if the stock reaches certain milestones, and seem to affirm that he believed $18 was only the beginning, and that $150 may be in the picture long term. Any long-term investor that applied a reasonable growth stock P/E of 40 , would see a scenario where Tesla will reach an 11 billion market cap by the middle of 2014. Although this may not happen, these numbers would have certainly provided a large amount of wiggle room for any long-term investor at the time.

Hedges being moved back causing Bullish Momentum?

Currently Tesla is nearly sold out for 2013, and is taking over 60 reservations per day. They have only recently begun promoting the Model S in Europe, and have barely begun in Asia. Elon Musk has emphasized that even if they were to close all their stores today, they would be sold out for 2013 (Assuming production is capped at 20,000).

With Tesla's stock up 100% as a result of this success, I suspect that anyone that purchased $30-40 calls when the stock was at $18 would lock in the profit, and adjust their position in accordance with their risk tolerance. If they had placed a hedged position in 2011, they would have likely bought calls that expired during the middle of 2013. (Since if Tesla survived, this would around the time when profitability would occur.) As of January 2013, they would be sitting on over 1000% gains.

I suspect they are using this as an ideal time to sell their options, and cover part of their short position. It is also possible they are rolling over their options into $50 2014 calls. If the price approaches $50, the value of the options will likely increase over 300%. Likewise, they could be continuing to short the stock to give themselves a cushion for if the stock falls unexpectedly.

Bulls Make Money, Bears Make Money, Pigs get Slaughtered

It seems likely that the majority of Hedge Funds who purchased $30 calls in 2011 will likely sell their calls, and roll over a certain amount of the cash raised into common stock. This will cause there to be more buying than selling, and the stock price will go up. (As it has been.)

If a Hedge fund had just cashed in their options with a 1000% gain, I don't think they would risk losing 20% of that. If the price fell to $30 on any unexpected bad news, all of their gains could disappear over night. Rather than hoping for the best, it would likely make more sense to sell their calls, and use a percentage of the cash raised to go long the stock. If Tesla does indeed reach $150 by 2015, these funds can make about 400% by owning the stock.

This would cause the kind of buying pressure we have been seeing and would explain why the short interest has remained relatively constant. I suspect Hedge Funds are as hedged as they can possibly be, and are constantly pushing back their options.

Conclusion

At $18, Tesla was effectively an all or nothing bet. If Tesla failed to meet their goals, the stock was likely going to 0. If Tesla succeeded, their stock had a high probability of reaching $100+ by 2014. Even if the stock had only gained 20% by mid-2012, a rationally hedged fund would have made more on the calls, than they lost by shorting it. I suspect the consistently heightened short interest very bullish long term.

At $39, I don't believe Tesla is priced for success. I believe that the stock will rise as funds that bought calls during the past two years begin to realize their gains. It is my suspicion that when these funds sell their calls, they will cover part of their short position, and move back their options. As of February 28th, short interest was at an all-time high of 31.9 million shares, roughly 36% of the total shares outstanding. Even though Tesla has delivered on all of their goals, and is standing by their guidance, shorts have not covered. The only explanation I can think of is that new hedges are being placed by either new people, or the same hedge funds that are simply rolling back their options. Because of this, even if Tesla reports a profit during the middle of 2013, I suspect there will not be a short squeeze, rather, there could be a prolonged up trend with a moderate term target around Morgan Stanley's initial 2011 Bullish target of $70. However, if for some reason shorts decide to/ are forced to cover, anything is possible. Long term, I see no reason a $150 Tesla Motors couldn't be in the cards.

Source: Tesla Motors: A Perfect Hedge