Investors betting against Tesla could be headed for 'short squeeze hell' after the EV maker's 2nd-quarter earnings

  • Tesla is the most shorted stock in the world, and investors betting against the EV maker lost $1 billion on Thursday, according to S3 Partners.
  • The short-selling research firm said “short squeeze hell” could be imminent as some investors cover their losing bets by buying Tesla to close. 
  • Tesla stock jumped 10% on Thursday after the company beat second-quarter profit estimates.

Tesla, the most shorted stock in the world, could experience an extended short covering rally after investors betting against the electric vehicle maker experienced $1 billion in mark-to-market losses on Thursday.

That’s according to S3 Partners, a short-selling research firm that told clients in a Thursday note that “short squeeze hell” is possible for Tesla, especially after CEO Elon Musk offered positive comments in the company’s second-quarter earnings call.

Production records at Tesla’s Fremont and Shanghai factories in June led Musk to say that the company has “the potential for a record-breaking second half of the year,” according to a transcript of the call. Tesla reported second-quarter profits that beat analyst estimates, helping drive a stock gain of as much as 10% in Thursday trades.

Part of Thursday’s rally was also driven by short-sell covering, which occurs when short sellers buy Tesla stock in the open market to close their losing positions. Tesla’s short interest currently stands at a notional value of $18.5 billion, according to S3 Partners. 

Meanwhile, Tesla remains the ninth most popular long position among hedge funds, and they could help fuel a momentum driven rally as short-sellers rush to cover their position.

“With Tesla’s stock price rallying and short sellers incurring $1 billion of mark-to-market losses today, we should expect its short covering trend to continue as short sellers get squeezed out of their positions due to these large and sudden losses,” S3 Partner’s Ihor Dusaniwsky said.

“These buy-to-covers and the potential for hedge funds to bulk up their positions in a high beta name with a positive price trend may help reverse Tesla’s year[-to-date] price weakness,” Dusaniwsky said.

Tesla stock is up 30% from its June low, but is still down 23% year-to-date.



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