Tesla bears celebrate a victory in longer, painful war

Tesla bears celebrated a one-day windfall of $662m this week, marking the latest skirmish between those investors betting against the US electric carmaker and its combative founder and chief executive officer Elon Musk.

Shares in Tesla tumbled almost 6 per cent on Thursday after a quarterly earnings call in which Mr Musk’s dismissal of “bonehead” questions about whether the company needed to raise capital compounded worries over its struggles to boost production of its mass-market Model 3 car.

For years the company has been one of the most-shorted companies in the US stock market, as hedge funds wager that its stock would inevitably crash back to earth once investors blanched at its losses.

That long proved painful, with short-sellers losing an estimated $2.3bn on their positions in 2017, according to S3 Partners, a financial analytics company. In early April last year the carmaker’s founder at one point gleefully tweeted: “Stormy weather in Shortville” as Tesla’s stock headed towards what would be a 46 per cent gain for the year.

But mounting concerns over Tesla’s cash burn have weighed on its stock and bonds in 2018, and an earnings call on Wednesday that Wall Street analysts described as “surreal”, a “circus”, “odd” and a “unique experience” soured sentiment further.

Tesla’s stock ended Thursday 5.6 per cent lower, leaving it down more than 4 per cent for the week. The price of the carmaker’s $1.8bn bond maturing in 2025 has tumbled from trading near par at the start of the year to 87.3 cents on the dollar, which translates into a yield of 7.5 per cent.

Investors have been intensifying bets against Tesla in recent weeks, and the company is comfortably the most shorted stock in America, with “short interest” at nearly $12bn. Those bets were still underwater this week, but Thursday’s tumble produced a $662m paper profit for short-sellers, according to S3 Partners. The year-to-date profit is now $645m, the analytics company calculated.

Tesla’s conference call — where Mr Musk interrupted a question about whether it would need to raise more money by saying “boring bonehead questions are not cool” and instead took questions from retail investors on YouTube — caused mirth at a conference for short-sellers in New York on Thursday.

At one point David Einhorn, a prominent hedge fund manager who has bet against Tesla, was asked about whether there were any particular companies in his “bubble basket” that he would like to discuss, and quipped: “That’s a really boring question. Let’s go to YouTube.”

George Schultze of Schultze Asset Management, which has a short position on Tesla, said that while the carmaker “unquestionably has some good products”, it was still “over-levered and has a cash flow problem”.

“The business plan is highly dependent on Tesla accessing the capital markets for additional cash,” Mr Schultze said. “To say that it is not necessary and to cut analysts off and say the questions are boring and irrelevant is immature at best and certainly not a ‘cool’ way to operate the company.”

Jim Chanos, a hedge fund manager that specialises in short-selling, has long been one of Tesla’s biggest critics on Wall Street, and has been betting against the company for four years. In late April he took to CNBC again to highlight the “torrent” of executives leaving Tesla, and impending competition from other big carmakers.

“Now the big boys are coming, and they’re coming with sexy-looking cars at the same price point with better features… What was unique for Tesla is no longer unique,” he said. “At some point investors are going to see that capital is being incinerated.”

Mr Chanos didn’t respond to requests for comments on his Tesla bet, but in an email to Reuters the famed short-seller said: “Don’t let Musk’s conference call theatrics fool you. He did not want investors to focus on his rapidly deteriorating finances.”

Additional reporting by Nicole Bullock, Chloe Cornish and Robert Smith.

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