Tesla’s Brutal Year Brings $17 Billion Windfall for Shorts

(Bloomberg) — Investors betting against Tesla Inc. are getting the big bonanza they have been waiting for, with the electric-vehicle maker set to record its worst annual performance on record.

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Short sellers in the company — or bearish investors who stand to gain when an asset’s price falls — are poised to reap mark-to-market profits of about $17 billion, making Tesla the most profitable short trade of the year, data from S3 Partners shows.

Tesla has tumbled more than 42% in December through Wednesday’s close, driving it to a loss of 68% this year — marking a radical about face for a stock that surged during the low-rate era of the pandemic.

It’s a rare victory for the shorts, whose 89% return comes after several years of significant losses, S3’s Ihor Dusaniwsky said. About 2.9% of Tesla’s free float is held short, according to S3 data.

Tesla has faced a tumultuous year, with investors fleeing risk assets over concerns about geopolitical uncertainty, high inflation, rising interest rates and a possible recession. Add to that worries that Tesla Chief Executive Officer Elon Musk’s focus will be diverted to his recently acquired social-media company, Twitter, just as demand for electric vehicles is set to take a hit.

Dusaniwsky expects short selling to persist until the stock reaches a bottom. But analysts and investors are still struggling to see a bottom, especially as the company is due to report fourth-quarter delivery numbers early next month and has been offering large buyer incentives.

Tesla shares rose as much as 7% to $120.60 in New York on Thursday for the second straight day of gains, showing some signs of relief after a seven-day losing streak dragged it down 31%. If the advance holds through the end of the session, it will the stock’s first back-to-back days in green since early December.

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Late on Wednesday, Morgan Stanley analyst Adam Jonas, who has had the equivalent of a buy rating on the stock since November 2020, said there is an “attractive entry for investors” amid the steep slide in the share price. Jonas cut his price target on Tesla to reflect lower pricing and reduced valuation of the company’s businesses, but said he expected the company to extend its lead over the EV competition in 2023.

Yet, even if share price begins to recover from here, Tesla’s notorious volatility could continue to linger, according to S3’s Dusaniwsky.

“When Tesla’s stock begins to tick upwards, there should be a flurry of short covering which will help boost its stock price higher and quicker as shorter-term short sellers look to realize their outsized mark-to-market profits before they evaporate,” he said.

(Updates stock move and adds details in seventh paragraph, adds analyst comments in eighth.)

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