Tesla short sellers lost $3.5 billion in two days of trading

One month ago, when momentum-chasing market pundits and other fair-weather experts were quick to throw Tesla out of the Magnificent 7 and forecast that the stock would keep on sinking indefinitely even as the AI bubble took the Big 5 into the stratosphere, Tesla remained one of the most shorted names in the hedge fund space and is one of the biggest mutual fund underweights"

The result of this was of course a face-ripping (potentially retail-led) short squeeze - and sure enough, just three weeks later we have seen the biggest meltup in TSLA history, the stock surging nearly 50% in just over a week.

Short interest in Tesla stood at around 3.5% of float, or 97 million shares shorted, with a $22.4 billion notional value. Many will now have been stopped out which means it’s probably a good time to short again, but let’s not go there!

So why were so many hedge funds short Tesla?

Back in April, Tesla and Apple’s poor share-price performance threatened to break up the Magnificent Seven. Their earnings weren’t growing in the same way and their potential future profits were…….lacking substance.

Tesla stock has gained in recent weeks after beating delivery expectations in the second quarter. Growth still wasn’t evident, but when did that ever get in the way of a good market tear-up. The Elon Musk-run company has seen its shares rise 40.9% over the past 30 days (only back to flat on the year mind) and now trades with some enormous valuation multiples.

Tesla has soared and Apple has topped $3.5 trillion.

That’s remarkable in itself, but what’s more interesting is that it has happened despite both companies’ sales slowing. Both will report earnings for the quarter through June in the next few weeks and if the trend is still disappointing, we could see another collapse.

Recent results.

In Q2, Tesla’s deliveries were down by 4.8% year-over-year, but this was better than the market expected. In the three months to June 30, Tesla delivered 443,956 vehicles, representing a 14.8% increase versus the first quarter.

So good news, if the current value reflected mediocrity, an increase in share price would make sense, but it doesn’t and is in fact one of the most overpriced companies (compared to earnings) in the S&P. Growth is down, meaning it’s not growth at all, it’s contracting by 4.8% compared to the same period last year.

Tesla stock had already started pushing upward in June after shareholders voted in favour of giving Musk his 2018 $56 billion pay package and reincorporating the company in Texas. The news led Tesla shares to jump more than 10%, taking it above $200 a share.

Again, it seems Tesla can rally on any news, even giving Elon more money.

Let’s look at the value.

As a manufacturer of cars, Tesla is clearly overvalued. Even Elon Musk has asked investors to value Tesla as a robotics or artificial intelligence (AI) company rather than one that purely focuses on the production of road vehicles – even if they are electric. As such, some analysts may question why Tesla, which was already trading on elevated multiples, has surged on the back of these improved EV deliveries. It’s a good point.

To say it’s not a car company would also be misleading given that around 81% of revenue last year was from, you’ve guessed it, selling cars.

The stock is currently trading at 96.4x non-GAAP forward earnings, making it the most expensive EV stock by many multiples and one of the most expensive technology companies.

Moreover, the expected earnings growth rate for the next three to five years is just 11.2%, inferring that analysts see very little tangible impact from the Robotaxi business over the medium term.

In turn, this leads to a price-to-earnings-to-growth (PEG) ratio of 8.7x. That’s far beyond what is normally considered attractive (1.0x or lower).

Other metrics compound this unattractive valuation. The stock trades at 8.3x TTM sales and 7.9x forward sales, representing an 830% and 813% premium to the sector, respectively. Tesla’s forward price-to-cash-flow ratio of 63.9x also represents a 585% premium to the sector as a whole.

However, Musk has been touting two major developments, which are due to take place over the next 18 months. The first is the long-awaited Robotaxi – set to be unveiled on August 8 – and the second is the sale of its Optimus robots, which may start in the second half of 2025.

We wait with bated breath as Elon’s is rarely accurate with these predictions.

What makes the shares attractive isn’t current sales. It’s the promise that artificial intelligence will bolster revenue down the line—a sign that the hype from AI is spreading more forcefully from hardware makers such as Nvidia to others that will benefit from better software.

To be sure, Tesla cannot say AI is strengthening its balance sheet at present. And that makes some analysts nervous. Tesla is trading at about 88 times forward earnings. Apple is on about 32 times. Both ratios are at their highest for a long time but Apple and Tesla are very different beasts. Apple has produced and performed for years. Tesla has not. Tesla seems to trade more like a cryptocurrency than a stock. It bears no relation to rational thought and there is simply no explanation.

There are die-hard Tesla fans out there who will no doubt say we’re looking at it all wrong and that Tesla is so much more, but we have yet to be convinced, and not one has come up with an argument, merely Elon style statements of possible dreams.

Investors probably aren’t buying Tesla shares now because of better prospects for electric vehicles. It’s because they expect some of Elon Musk’s moonshot ideas to turn into something spectacular. His recent tweets about xAI making its own chips may have been bad news for Oracle, but it shows where Musk’s attention is. The hope is that advances there will spill over into Tesla.

AI - Elon is quick to say the two letters every time he is questioned about valuations and earnings, but what has AI really done for the corporate balance sheet? We’ve no doubt AI will ‘change the game’ but where does Tesla fit into this? It is, as we’ve pointed out, a (very overpriced) electric car manufacturer.

We will see.

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