Shorting Tesla is the ‘widow-maker’ trade of 2020

Short sellers have been preying on Tesla stock for years. Have they finally reached their come-uppance? “Most big Tesla shorts aren’t losing sleep or missing meals because of their positions,” Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners told Institutional Investor. “They still think this will eventually go their way.”  

Above: Anti-Tesla traders try to put the brakes on Elon Musk (Source: EVANNEX)

“It’s a picture of the perseverance of the short-sellers that are left,” says Dusaniwsky. The magnitude of losses short-sellers have endured is “just absurd,” he says, compared to bets against other companies, with Tesla “by far the longest unprofitable short I’ve ever seen.”

If these short sellers are right, why did Tesla stock just reach an all-time high, soaring past $2,000 per share yesterday? Short seller Mark Spiegel chalks it up to “this whole gambling mentality that took place,” related to trading apps like Robinhood, "because people got stuck at home” during the pandemic with stimulus checks to spend.

“It was almost anything but a short squeeze that drove this thing up,” Spiegel says of Tesla’s stock price increase. Dusaniwsky isn't so sure. “The shorts are still being squeezed,” he says. “Losses are mounting and shorts are still covering.” Meanwhile Tesla's poised for S&P 500 inclusion and just announced a 5-for-1 stock split.

Looking back, Wall Street banks warned the "bears" (those negative on TSLA) to be careful. Barclays analysts, mostly skeptical on Tesla, admitted they were “not clear on when momentum breaks” and urged their “bearish friends” in July to stay “in the shelter of their caves.” 

Above: A look at both the long-term investing thesis and short sellers surrounding Tesla's stock (YouTube: Wall Street Journal)

Many didn't listen. Well-known shorts David Einhorn of Greenlight Capital and Jim Chanos of Kynikos Associates are clinging to their bets against Tesla. Why? Short-seller Spiegel believes Tesla is just a cult stock. “I know that eventually enough people will leave the cult,” Spiegel says of Tesla, “and the stock will collapse.”

Spiegel believes (and has for years) that competition is right around the corner. Though he readily admits many investors probably won’t lose any enthusiasm for Tesla until they start seeing electric cars made by Volvo, BMW, Mercedes-Benz, or Audi on the road. 

Does Spiegel have this all backwards? Is the reverse happening? After all, Tesla's electric cars pose a competitive threat to legacy gas-powered cars from traditional automakers. Could the auto industry's ICE age, finally, collapse?

Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) in Germany told Forbes that Tesla's "enormous investments in new plants is overshadowing the established premium manufacturers," even in the midst of "the Corona crisis." In turn, he says, "Tesla is becoming a very serious competitor in the premium market. Its development compared with BMW, Audi, and Mercedes is astonishing."

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Source: Institutional Investor, Forbes, Wall Street Journal