Shorting Tesla — An Intriguing Drama

Tesla made Elon Musk the richest man in the world for a few days (Bezos has taken back his place). While doing this, it has also made some people lose billions of dollars.

They have lost money shorting Tesla.

Tesla is an American electric vehicle company whose products include electric cars, battery energy storage, solar panels and solar roof tiles, etc.

What does it mean to short a stock? How are people losing money shorting Tesla?

I will take the questions one by one.

When you short a stock, you are saying that a stock is not worth what people are presently paying for it, and so you are taking the opposite position of buying so you can profit.

Let me use a relatable example: Assuming that during the December period, your neighbor who has the best washing machine around is travelling to her hometown. It is the best available washing machine on the market right now. This 8kg Wash & 5kg Dry Front Load 2 In 1 Smart Washing Machine costs N400,000. By some rumor on the mill, you discover that LG is releasing a new washing machine which is much better than the one on the market.

Being a smart alec, you instantly realize you can make some quick bucks. So you tell Sandra, your neighbor, “Can I use your machine while you are away on holidays? I realize that I would need an extra one during these festivities and since you won’t be using it right now, I would not mind having it.” Sandra say, why not. Immediately Sandra releases the machine to you, you sell it off at N400,000.

Just as you expected, the news breaks that a newer better washing machine is being released. Everyone is excited that their washing machine experience will be totally on another level. The price tag of this new washing machine is also N400,000. Of course the price of Sandra’ washing machine will drop. It’s now down to N250,000. You go to the supermarket and purchase Sandra’ model washing machine at N250,000. (N150,000 less than you sold it a few days ago. You have N150,000 for detty December).

When Sandra got back, you return her washing machine together with a bottle of N30k-worth Martinelli’s Sparkling Wine to show your gratitude.

In market-language, you have shorted Sandra’s washing machine.

When you short a stock, you are borrowing the stock, selling it to the market place and hopefully buying it back at a discounted value when replacing the borrowed shares.

For many years, analysts have said that Tesla stock is overvalued. In other words, people are paying far more than its worth. They have rung the bell that the stock is significantly overvalued.

According to technical and fundamental, people are buying Tesla as though it has 15 times the revenue it is projected to have at the end of 2021. They are also buying it as if it has 175 times its projected earnings.

(Revenue is the income a company generates before deducting expenses. Earnings, on the other hand, represents the profit a company has earned; it is calculated by subtracting expenses, interest, and taxes from revenue.)

It is unprecedented in the stock market for a car company to trade at this kind of level. In fact, analysts spearheaded by JP Morgan say that for Tesla to justify its current stock price of $850, it will have to post over 2 times the profits of the top ten automakers combined. The top 10 largest automakers include Toyota, Ford, Volkswagen and Honda. Tesla is number 19.

JPMorgan says the worth of Tesla is $90.

Since Tesla started climbing, traders have been shorting it. As I explained earlier, they are borrowing Tesla at current market prices, selling it to the market and hoping that the price drops like analysts have said.

Stock shorting is not a new phenomenon. As far back as the 1920s, Jesse ‘Wolf of Wall Street’ Livermore became stupendously rich by shorting stocks ahead of the crash of 1929. A man called Jim Chanos made $500 Million profit by shorting Enron, which eventually collapsed. Michael Burry rose to fame by shorting the U.S. housing market. He remains one of the few investors to have profited from the 2008 financial crisis. He made over $100M while providing $750M in profits for his clients. Valeant Pharmaceuticals stock fell dramatically in 2015 from its all-time high of $260 to a low of $8. Those who shorted it made millions of dollars. As stocks of Nikola and Wirecard went down in 2020, some people who shorted them made hundreds of millions.

But for Tesla, shorting it has not been profitable. At all! Since the stock started rising in very early 2020, those who have shorted Tesla have lost a combined $40 billion in 2020, according to analysis by S3 Partners. Among them are the shorting legends, Jim Chanos and Michael Burry.

As they lost $40 billion, Elon Musk made more than $120 billion. Not bad for a guy who in 2008 declared bankruptcy on his lofty ambitions of electric cars. As a matter of fact, Musk recently mentioned on Twitter that he tried to sell Tesla to Apple (most likely in the 2010s) when the company was struggling but Tim Cook ‘refused to take the meeting’.

However, for all that has been lost in the pessimism of the stock, many short sellers are not relenting.

Michael Burry has emphatically warned Tesla investors to “Enjoy it while it lasts.”

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