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Musk tweeted on 7 August that he had ‘secured’ funding to take the company private, but so far no offer has been made.
Investors betting on a fall in Tesla’s share price have made $1.09bn since 7 August, when Tesla founder Elon Musk tweeted he had “secured” funding to take the troubled company private.
The electric car company’s soared 11% to $379 after Musk’s so-called “Tesla tweet” that he had “funding secured” to buy out investors at $420 share. But that tweet – now the subject of legal action and a regulatory inquiry – so far has not led to an offer and Tesla’s stock has fallen 19% to $308 share.
Musk has frequently clashed with Tesla’s short sellers--investors who bet on a company’s share price collapsing. The battle between Musk and short sellers has become increasing vituperative and personal. He has accused them of being saboteurs who “want the company to die”. As recently as mid-June, Musk predicted via Twitter that investors “have about three weeks before their short position explodes”.
Arrayed against him are investors who have been willing to lose around $5bn since 2016 on their strong belief that Tesla cannot deliver on it promises.
“What bothers me is not so much the personal stuff and the personal attacks. I’m used to that. It’s the willingness to say things that I think he knows are a stretch, to be polite,” investor Jim Chanos, founder of Kynikos Associates, who has been betting against Tesla for years, said in July.
“I don’t think you get to tell people you’re going to make 20,000 Model 3s a week when you know that’s not going to be the case,” Chanos added, referring to the problems hampering production of the mass-market Model 3.
Battle of wills
According to S3, a financial technology and analytics firm, 33.4m Tesla shares worth $11.2bn worth, or more than a quarter of the company’s free float, are out on loan to investors betting that its share price will fall.
To those investors, Tesla’s market capitalization, projected revenues and production capacity just don’t add up.
“This has been one of the largest shorts in the US for several years,” says Ihor Dusaniwsky, managing director of predictive analytics as S3 Partners. “It’s become a battle of wills. The big players on the short side have a conviction that the stock is going to tumble to bankruptcy.”
During the markets’ initial acceptance that Musk would be able to raise around $70bn to take Tesla private, the rise in stock added $6.4bn to Tesla’s market cap. That cost short sellers like Chanos around $1.3bn and triggered law suits.
But stock in the company has fallen on reports that Securities and Exchange Commission officials are intensifying a probe into Tesla’s public statements and Tesla’s board made it clear it had scant knowledge of a Saudi Arabian pledge investment that Musk claimed to have received in a blog post last week and which he claimed “was just a matter of getting the process moving”.
On Friday, after the New York Times published an interview with Musk that sparked concerns over his health, Tesla’s stock dropped 9%, bringing Tesla down 19% from their pre-tweet level.
On Monday, JP Morgan cut its December price target for Tesla back down to $195 per share. Analyst Ryan Brinkman explained to clients in a Monday note that their interpretation of events “leads us to believe that funding was not secured for a going private transaction, nor was there any formal proposal”.
Needham analyst Rajvindra Gill said the real valuation of Tesla shares is “closer to $200,” or 30% lower than the $292 share price at the market’s opening on Monday, and 40% lower than on 6 August, the day before Musk’s now-infamous tweet.
According to S3, that would bring short sellers up $3bn for the year but still down historically.
“The big short sellers are strong and they’re not looking at their quarter-to-quarter returns. They have the pedigree to keep a position and not be forced out of it,” said Dusaniwsky. “They’re sure they’re right and don’t want to be proven wrong so they’re going to stay in as long as it takes.”
In a letter to investors last week, UK hedge fund manager Crispin Odey, compared Musk’s recent behaviour to that of Donald Crowhurst, an amateur sailor who in 1968 set off on a solo voyage around the world but never returned.
“Shorts like Tesla have been difficult to hold on to,” Odey wrote in the investors letter, according to Bloomberg . “However, Tesla feels like it is entering the final stage of its life.”