There's been a lot made over Tesla Motors (TSLA) in 2013. The stock had an epic run from the mid $30s to nearly $200 in just a couple of months. The bubble burst for a while, sending shares down to $116, but they have recovered nearly half of their losses. One curious item to note is that the battle over Tesla is really heating up again. Today, I'll detail why that is, and see where this heavily debated name stands now.
Here come the shorts again:
Tesla was a name that frequently appeared on my short interest series list. Back at the end of July, I detailed how Tesla's short interest had really come down. Part of the reason for Tesla's epic rally was short covering. Tesla's short interest had not really moved much during the summer and early fall. However, November was a very crucial month for Tesla's short interest, which spiked higher as you can see in the chart below.
At more than 29.15 million shares short at the end of November, the latest update for short interest is the highest point since the middle of April. Short interest for Tesla increased by nearly 8 million shares in the month of November, a rise of 36.12%. Since the short interest bottom was hit in July, Tesla's short interest is up nearly 58%. As you can see in the chart above, this was a significant move.
Is there short squeeze potential?
When it comes to short squeeze potential for Tesla, the market is sending some mixed signals. Let me first start with the signal that says a short squeeze is not coming. Tesla's days to cover ratio, which measures the number of days it would take all short positions to be covered, is relatively low. Let me explain how this works. If Tesla has 30 million shares short, and the average volume is 10 million shares per day, it would take 3 days for all shorts to cover. Generally speaking, a days to cover ratio in the low single digits means short squeeze potential is not there. A ratio in the high single digits or even double digits makes a short squeeze more possible. Well, at the latest update, Tesla's days to cover ratio per NASDAQ was 2.04. That is a low number, and well below the 20s and 30s this ratio was in earlier this year and late in 2012. At that point, a short squeeze was much more likely, and well, we saw what happened earlier this year.
So even though Tesla's short interest has spiked, the days to cover ratio really hasn't risen to a level that needs watching. This is because Tesla is a very active stock, trading an average of 10-15 million shares a day. Now I wouldn't be surprised if the next couple of short interest updates show a rise in the days to cover ratio. If Tesla's volume comes down a bit, something possible around the holidays, you could see the days to cover ratio spike. This will also depend on how short interest fares going forward. If Tesla's days to cover ratio gets back towards 5 or even the high single digits, it would make a short squeeze more likely.
The second item many like to look at is the percentage of shares short when compared to the outstanding share count and float. The higher the percentage, the more likely a short squeeze. We've seen how names like Netflix (NFLX) and Green Mountain (GMCR) have short squeezes with 20%, 30%, or higher short counts. Based on the Yahoo! numbers for Tesla, Tesla has almost 24% of its outstanding share count and 37% of its float shorted. Those numbers are very high, and indicate a short squeeze is possible. Tesla shares have spiked more than $30 recently, so it is possible that a squeeze has come already. On the other hand, with shares back near $150, it is possible that more shorts are piling in at higher prices. The next update on Tesla short interest will come after the bell on December 24th.
Where estimates stand now:
A lot has been made since Tesla reported third quarter results, which weren't as great as hoped. Revenues blew past estimates, and earnings per share did beat by a penny. However, given the huge run in the stock, the penny beat was a bit short of whisper numbers. Additionally, the more than 5,500 cars delivered in the quarter fell short of many analysts' hopes. As you can probably expect, Tesla's estimates have changed a bit since that report. The table below shows the average analyst estimates since the day Tesla reported Q3.
*2014 revenue growth number based on 2013 estimate at that time, which will continue to change until we get final 2013 results.
As you can see from the table, revenue estimates have gone higher since Tesla reported Q3. Yes, the 2014 revenue growth rate has come down. However, that is more due to the 2013 number being hiked higher. In this case, I'm not as concerned with the growth rate because the 2014 revenue estimate is increasing. I'd be much more worried if the revenue number was coming down.
On the other hand, the non-GAAP earnings estimate average has come down for both years. Tesla had a huge revenue beat in Q3, but the company didn't see a flow through to the bottom line. Had the company come in at $0.15 or $0.20 for the quarter, it would have been much more positive for Tesla. Tesla currently trades for about 100 times the 2014 non-GAAP earnings estimate. While that is a very high number compared to the market and a normal company, this is a very high growth company. Investors are willing to pay huge premiums for names like Tesla, Netflix, and others. For now, profitability doesn't seem to matter to some, but revenue growth is crucial.
Tesla is not the only one:
You probably expect that with markets at or near highs, short interest will be increasing for select names. Tesla is not the only momentum name to see a huge increase in short interest recently. Facebook (FB) saw its short interest nearly double from 23.5 million shares at the end of August to over 44.3 million shares in the middle of November. Facebook's short interest did come down to 41 million in the latest update, but it is still elevated. That mid November data point was the highest number for Facebook's short interest in 11 months. For Facebook, 44 million shares is a relatively small portion of the 2.45 billion outstanding shares and 1.64 billion float. However, the trend is what's important, and a shift in sentiment against some of the momentum names appears to be here.
The other interesting name to watch is Twitter (TWTR), the social media giant that only recently went public. At the first short interest update after going public, Twitter had just 6.3 million shares short. That seemed tiny in terms of a 545 million outstanding share count and 284 million float. However, just like right after the Facebook IPO, short interest would start to rise quickly. At the second update for Twitter, more than 17.7 million shares were short. All of a sudden, that's 6.25% of Twitter's float. The importance here for Twitter, Tesla, or whatever low float name you are discussing, is that short interest can turn quickly. Depending on the direction, you can get a really big move in the stock. Tesla has gone from $116 to $150 in a relatively short time period, and Twitter has gone from $39 to $59 in just three weeks.
Short sellers are going after Tesla again, with short interest spiking during November. That may not be too surprising as Q3 results were not as great as hoped, forcing earnings estimates lower for 2013 and 2014. Facebook and Twitter have also seen their short interest jump in recent months. Tesla's shares have spiked in the past few weeks, some of which may be due to short covering. However, if we don't see a significant decline in short interest at the next update, the potential for a short squeeze may be back. Tesla is not as great a buy as it was under $120, but at least you are not paying $190 plus either.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.