Tesla: Short sellers’ golden goose
21 November 2016
Tesla shares were responsible for an astonishing 3 percent of the securities lending industry’s total revenue. IHS Markit’s Simon Colvin reports
Image: Shutterstock
No single US stock has derived more column inches or divided opinions over 2016 more than upstart electric carmaker Tesla. The last 11 months have produced as many twists, potentially ground-breaking product launches and controversies than many companies would expect in a decade, but this is what we have come to expect from a company whose CEO, Elon Musk, also dabbles in space exploration, among a host of other issues.
Much of this difference of opinion was expressed through short selling as investors tried to reconcile the enthusiasm around the company’s ground-breaking product lineup with its ongoing cash burn in its efforts to pivot away from the niche market onto affordably priced mass production. These dueling forces ensured that the demand to borrow Tesla shares never fell below the 15-percent-of-shares-outstanding mark at any point throughout the year. This consistently strong demand to borrow Tesla shares from short sellers cemented their position as the top revenue generating asset of the securities lending industry. The $220 million generated by lenders of Tesla shares was responsible for an astonishing 3 percent of the securities lending industry’s total revenue.
Short sellers started on the front foot as the market volatility experienced in Q1 2016 saw Tesla shares lose as much as 37 percent in the six weeks leading up to the 52-week low set on 10 February. Demand to borrow Tesla shares then quickly rose past the 25 percent of shares outstanding mark. Short sellers stayed resolute despite a rally that saw Tesla shares regain the near totality of the ground lost in the opening weeks of the year.
This rebound ensured that short sellers were roughly even for the year heading into arguably the most watched Tesla event of the year, the unveiling of the Model 3. This model will set the ground for Tesla’s entry into the mass market and will see the company boost production from the current 80,000 vehicles per year to 500,000. Skepticism around Tesla’s ability to deliver on this ambitious pledge and carve out a profit on the $35,000 price set for the Model 3 drove short selling to fever pitch as more than 80 percent of shares in lending programmes were out on loan ahead of the Model 3’s unveiling.
The Model 3 was nonetheless well received with more than 350,000 potential purchasers lining up to reserve their spot in line for the initial deliveries estimated to start in late 2017. This sent Tesla shares rallying by 17 percent, which saw shorts sellers underwater for the year. Tesla’s Musk was keen to press his upper hand on short sellers soon after the post-Model 3 surge when he warned his six million Twitter followers that shorting Tesla shares was “probably unwise”. This comment was heeded by a third of Tesla’s short sellers in a wave of short covering in the subsequent weeks.
This covering carried on in earnest over the following months despite the fact that Tesla’s proposed purchase of ailing rooftop solar manufacturer SolarCity, which is controversially run by Musk’s cousin, further emboldened its critics. Incredibly for momentum-driven short sellers, the covering occurred in the face of a renewed slide in Tesla’s shares.
The final act for short sellers came in the wake of the 8 November US election, which saw demand to borrow Tesla bounce back to more than 20 percent of shares outstanding as investors pondered whether the incoming Trump administration would have the same appetite for subsidising solar and electric cars as the Democrats.
Beneficial owners that lend their shares have remained relatively steadfast throughout all of this volatility as the number of Tesla shares in lending programmes has stayed range-bound between 24 and 26 million shares since the start of the year.
These holders have been handsomely rewarded as the consistently high demand to borrow Tesla shares means that the average return delivered by every share in lending programmes since the start of the year has been 480 basis points.
Much of this difference of opinion was expressed through short selling as investors tried to reconcile the enthusiasm around the company’s ground-breaking product lineup with its ongoing cash burn in its efforts to pivot away from the niche market onto affordably priced mass production. These dueling forces ensured that the demand to borrow Tesla shares never fell below the 15-percent-of-shares-outstanding mark at any point throughout the year. This consistently strong demand to borrow Tesla shares from short sellers cemented their position as the top revenue generating asset of the securities lending industry. The $220 million generated by lenders of Tesla shares was responsible for an astonishing 3 percent of the securities lending industry’s total revenue.
Short sellers started on the front foot as the market volatility experienced in Q1 2016 saw Tesla shares lose as much as 37 percent in the six weeks leading up to the 52-week low set on 10 February. Demand to borrow Tesla shares then quickly rose past the 25 percent of shares outstanding mark. Short sellers stayed resolute despite a rally that saw Tesla shares regain the near totality of the ground lost in the opening weeks of the year.
This rebound ensured that short sellers were roughly even for the year heading into arguably the most watched Tesla event of the year, the unveiling of the Model 3. This model will set the ground for Tesla’s entry into the mass market and will see the company boost production from the current 80,000 vehicles per year to 500,000. Skepticism around Tesla’s ability to deliver on this ambitious pledge and carve out a profit on the $35,000 price set for the Model 3 drove short selling to fever pitch as more than 80 percent of shares in lending programmes were out on loan ahead of the Model 3’s unveiling.
The Model 3 was nonetheless well received with more than 350,000 potential purchasers lining up to reserve their spot in line for the initial deliveries estimated to start in late 2017. This sent Tesla shares rallying by 17 percent, which saw shorts sellers underwater for the year. Tesla’s Musk was keen to press his upper hand on short sellers soon after the post-Model 3 surge when he warned his six million Twitter followers that shorting Tesla shares was “probably unwise”. This comment was heeded by a third of Tesla’s short sellers in a wave of short covering in the subsequent weeks.
This covering carried on in earnest over the following months despite the fact that Tesla’s proposed purchase of ailing rooftop solar manufacturer SolarCity, which is controversially run by Musk’s cousin, further emboldened its critics. Incredibly for momentum-driven short sellers, the covering occurred in the face of a renewed slide in Tesla’s shares.
The final act for short sellers came in the wake of the 8 November US election, which saw demand to borrow Tesla bounce back to more than 20 percent of shares outstanding as investors pondered whether the incoming Trump administration would have the same appetite for subsidising solar and electric cars as the Democrats.
Beneficial owners that lend their shares have remained relatively steadfast throughout all of this volatility as the number of Tesla shares in lending programmes has stayed range-bound between 24 and 26 million shares since the start of the year.
These holders have been handsomely rewarded as the consistently high demand to borrow Tesla shares means that the average return delivered by every share in lending programmes since the start of the year has been 480 basis points.
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