Tesla Sentiment Check - Public Too Optimistic On Earnings Release?

| About: Tesla Motors (TSLA)

After the closing bell, Tesla (NASDAQ:TSLA) is scheduled to announce their second quarter earnings. Thus far, analysts are expecting around a 16 cent per share loss for the quarter and revenue of $402.11 million in revenues.

While the question that may be on the investing community's mind may currently be, "will they beat or miss earnings?" we should also consider how public sentiment is around the stock. If the public is overwhelmingly optimistic about earnings, then even an earnings beat may fail to exceed the public's expectations, which would drive prices down, despite the positive news. Conversely, if the public is expecting an awful quarter, and Tesla releases a modestly negative earnings report, investors may bid up the price of the stock anyway as the miss was less than expected.

So let's take a look at how the public is feeling about Tesla.

Sentiment Polls

Sentiment polls are conducted on individual stocks on various sites on the web. One of the polls is conducted on the social media site, StockTwits.com. Here, the percentage of bulls and bears on an individual stock is calculated as a seven day moving average of the votes among the StockTwits community.

At this point, the StockTwits community, representing mainly active retail investors/traders and some industry professionals, is bullish on Tesla in the near term, with only 17% of the community bearish on the stock. And, after some rough calculations, about 400 votes are cast a day. So, if the current sentiment numbers represent a seven day rolling average, then about 2800 votes have been counted in this poll. With enough participants to suggest these sentiment numbers are not skewed, we can conclude so far that the community is expecting a positive earnings surprise.

Gauging Sentiment With Short Interest - The Potential For Another Squeeze?

The magnitude of the stock's reaction to Tesla's earnings release on May 8th was largely as a result of a short squeeze. On April 30th, the last time short interest was recorded before the May 8th earnings release, Tesla's short interest was 27,501,901, at 7.96 days to cover. As new buyers piled into the stock thereafter, shorts squeezed the price even higher as they attempted to cover their positions. In just two weeks, short interest declined by 4.5 million shares, sending the days to cover down to 1.56. Could this happen again? Take a look at the chart below.

While anything is possible, a major short squeeze looks much less likely this time, as NASDAQ OMX's last release of short interest figures puts Tesla's short interest at roughly 10 million shares less than it was at the last earnings release and the days to cover down to 2.13. This weighs negatively on the reaction to any report tomorrow, as the stock has become more liquid and there are fewer short sellers to be squeezed out of their positions, should the reaction to earnings be positive.

Bets Placed With Options

Another simple way I have found to judge speculator sentiment on a stock's earnings is to watch the option chain for the stock. First, calculate the open interest ratio on the closest, non-weekly options for the past five days using at least 8 strike prices for each day. The ratio is calculated as:

Open Interest Ratio = Put Open Interest/Call Open Interest

If the ratio is significantly falling up until earnings date, then many more investors are placing bets with call options than with puts. This should be viewed as excessive bullishness, which would suggest that earnings may fail to lure even more investors into buying the stock, as expectations will likely be very high. Let us see if this is the case for Tesla.

Here are the open interest ratios for since last Wednesday.

So what we see is a modest uptick in bullishness. Most significant is that put open interest has shrunk while call open interest has remained relatively stable. This indicates that either bears are not willing to bet bearishly on Tesla through the earnings release or current holders of Tesla stock are comfortable holding their stock without protection. Meanwhile, call option holders are content with their bullish positions This again suggests that the community is more positive than negative on Tesla's earnings release.


Given the weight of evidence, objective sentiment analysis says that the public as a whole is expecting a positive earnings surprise from Tesla. While this does not doom Tesla's stock to decline regardless of the results, it does indicate that any earnings beat will have to be by a wider margin to exceed the public's already positive expectations. Finally, as a stockholder and loyal product follower, this says to me that, after riding its solid run higher, it may be time to take some stock off the table to reduce my risk and be ready to buy again when the mass optimism subsides.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I will be exiting my TSLA prior to the evening earnings release.