Tesla Short Squeeze Chances Fall

About: Tesla, Inc. (TSLA)
by: Bill Maurer

Short interest has retreated quite considerably.

Increase to outstanding count and float don't help situation.

Is this more a market thing than a Tesla thing?

There's no doubt that there has been a substantial amount of non-believers when it comes to Tesla (TSLA). Between the company's large losses and cash burn over time, coupled with a substantial valuation, many bets have been placed against the name. For a long time, this meant that a huge part of the Tesla bull case was the possibility of a large short squeeze. Unfortunately, those hopes have fallen quite considerably recently.

Looking back at the data I have since I started covering Tesla a number of years ago, the lowest point I have for short interest is about 18.5 million shares, which was in July 2013. Over time, the number of shares short rose, and a considerable jump was thanks to the SolarCity buyout, especially as there were a ton of shares short that name as it was on the brink of bankruptcy. Over the last year, however, things have changed quite a bit, and just in the past couple of months, short interest has fallen as seen below.

(Source: Nasdaq Tesla short interest page)

Now it was in April of last year where short interest was more than 39 million shares. Since then, the number of shares short has dropped by 36.6%, but the stock is up less than $20 a share. In fact, Tesla's shares have basically been flat over the past 22 months, while the Nasdaq is up more than 25% over that period. At this point, short interest is back to levels not really seen since the summer of 2015. However, a lot has changed since then, not only for Tesla, but the overall market.

Since then, the Nasdaq is up about 60%. Have investors in general lost interest in shorting stocks? It's definitely a possibility. Short interest in the Invesco QQQ ETF (QQQ) is down by nearly half since its early 2018 peak, while Apple's (AAPL) short interest is down 40% since then despite its recent troubles. Also, there's a definite chance that some who had a pair trade on, long Tesla bonds and short the stock, have unwinded that trade as bonds are coming due. Tesla had $230 million bond mature a few months ago, and next month there's a $920 million bond maturity. That could easily explain a few million shares of short covering.

The other major part of a potential short squeeze has to do with shares outstanding and the tradeable float. Since those 2015 levels, both numbers have risen quite a bit. In that summer, the outstanding share count was a little more than 127 million per the 10-Q filing, while the float was in the high 90 million area. While we are still waiting for the 10-K filing to come out, we know that the outstanding count is around 172 million and the float is nearly 126 million. With the same number of shares short, it's a lot harder for a squeeze to occur when your float jumps by almost 30%. The pending Maxwell (MXWL) acquisition, if completed, would dilute investors a little more as well, since it's an all-stock deal that likely would increase Tesla's share count by more than a million shares.

Yes, I will say that Tesla does look a bit healthier currently than it did in the past. It seems like it will have gotten through a couple of major debt maturities without major trouble. However, I will point out that some of its expense improvement may not be due to automotive but due to the gutting of the solar business. It will take a few more quarters to really see what the long-term margin picture looks like. The company is not out of the woods just yet, and it would certainly help if more capital was raised to fund the large amount of projects scheduled for the next few years.

It will be interesting to see how short interest fares as Q1 continues on. So far, the quarter has started fairly slowly for Tesla, thanks to headwinds like the US tax credit halving and transit times for Model 3s being longer as they move to Europe and Asia. Thursday marks the halfway point of the quarter, and no Model 3 units have been registered yet in Norway, Tesla's most important European market. While more ships are arriving in the coming days, if the company's logistics struggle, Q1 results could be much worse than expected. The company also appears to be well behind on its plan for service and supercharger growth this year, further impacting customers.

In the end, short interest for Tesla has plunged since the peak last spring, while a rising share count and float don't help the situation. Given the market's huge rally in recent years, while Tesla hasn't done much, it's possible that short sellers in general are just leaving the market, along with some bond/stock pair trades unwinding. Even though Tesla's situation may not be as dire as it was in the past, those expecting shares to jump on a short squeeze should revisit this part of the bull case.

Author’s 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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.