(Bloomberg) -- Tesla Inc.’s blowout earnings caught everyone off guard.
But it was the bears who paid the price this week. The electric-vehicle maker’s results delivered a gut-punch to short-sellers — investors who make money by betting that a security will fall over a certain period of time — when they saw all their profits for the entire year wiped out in just one trading day.
Expectations going into Wednesday’s after-hours report from the EV giant were low, the stock was down some 14% for the year and Wall Street and Main Street alike thought demand for EVs would continue to struggle. Instead, Tesla delivered an upbeat report and Chief Executive Officer Elon Musk told investors the company would see as much as 30% growth in vehicle sales next year.
By the end of Thursday Tesla had added $150 billion to its market value on a 22% stock surge — the biggest one-day jump since 2013. Short sellers, on the other hand, took an estimated mark-to-market loss of $3.5 billion, according to data from S3 Partners. Even worse, their year-to-date profit of $1.7 billion was erased, shorts are now down $1.8 billion for 2024.
“Tesla’s guidance was extraordinary,” said Steve Sosnick, chief strategist at Interactive Brokers. “At least for yesterday, the market was willing to trust Elon Musk’s assertions about sales growth.”
Shorts weren’t the only ones caught off guard by the report. Analysts on average were expecting Tesla to report a 10% drop in quarterly profit. Instead, the company came in with a 9% jump from the previous-year period. And a key metric for Tesla — automotive gross margin excluding regulatory credits — also blew past expectations.
A peek into options positioning reveals investors weren’t prepared for a large move higher. Options trading implied that traders were expecting the stock to move around 6% in either direction after the results. That’s a low number to begin with, given Tesla shares had moved at least 9% after the previous seven quarterly earnings reports.
Now, with at least some faith restored that the worst part of the slowdown in EV demand might be over, and that the company is making steady progress on developing a fully self-driving car, investors are piling back into the stock. Demand for call options increased as traders chased the rally. Three-month calls moved to a premium over bearish puts Thursday for the first time since late August.
Wall Street is turning more optimistic as well. Several analysts raised their price targets on Tesla after the results and the rapid jump in the stock price. And bears are becoming rarer. Just about 2.9% of Tesla’s free float is now held short, S3 data show, hovering near what the firm called “historic lows.”
While the rally in Tesla was unusually strong, markets watchers, including S3 Partners’ Matthew Unterman and Citigroup’s US equity trading strategist Stuart Kaiser, see little sign that the gains were due to a so-called short squeeze — where traders are forced to cover their bearish bets quickly, ending up reinforcing an asset’s upward momentum.
“Thursday’s move seems more driven by surprisingly strong results against a backdrop of an under-owned stock rather than aggressive short covering,” Kaiser said, noting that short interest in the stock is low.
“There was pent up demand for the stock to do well,” said Dave Mazza, chief executive officer at Roundhill Financial. “There are devoted followers, both retail and institutional, who were waiting for anything less than the worst news to pile back in.”
Disappointment after the company’s unveiling of self-driving vehicles earlier in October, and the selloff that followed, also kept sentiment on the stock subdued.
“Considering the robotaxi debacle, its recent propensity to sell off after earnings, and the perception that the stock might have been poised for a breakdown if that occurred, I believe that many traders were caught offsides and that many investors found themselves under owning the shares,” Interactive Brokers’ Sosnick said.
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