Despite Record Highs, Tesla Shorts Aren't Backing Off Much

By Evan Niu, CFA Markets Fool.com

Electric-car maker Tesla (NASDAQ: TSLA) is arguably the most prominent battleground stock, and it's only becoming more polarizing as the company continues to march toward Model 3 production. You either love Tesla or you hate Tesla, with little room in between.

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Shares are up over 40% year to date, tapping fresh all-time highs last week. Tesla reported strong first-quarter deliveries of 25,000 vehicles at the beginning of April, with a rising mix of Model X SUVs, which helped drive shares higher at the start of the month. Still, bearish short-sellers don't appear to be backing off quite yet, despite sustained losses.

Short interest remains incredibly high

Nasdaq has just released its official short interest numbers for the end of March, and the number of shares held short actually climbed higher compared to the beginning of March, although it was slightly higher a couple months ago.

Settlement Date

Short Interest

Average Daily Share Volume

Days to Cover

March 31, 2017

31.35 million

5.2 million

6

March 15, 2017

31.07 million

4.05 million

7.7

Feb. 28, 2017

31.01 million

8.5 million

3.6

Feb. 15, 2017

32.2 million

4.65 million

6.9

Jan. 31, 2017

34.35 million

4.64 million

7.4

Jan. 13, 2017

35.04 million

5.54 million

6.3

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Data source: Nasdaq.

It's worth pointing out that a March 31 settlement date corresponds to a trade date of March 28, which was about a week before the jump after the delivery announcement.

Business Insider points out that Tesla short-sellers have already collectively lost billions of dollars, according to data from financial analytics specialist S3 Partners, which tracks short data in more granular detail than what the exchange discloses. Short interest is an incredible 38% of float right now.

Catch-22

There are a lot of moving parts with Tesla's current short situation.

While shorts commonly (and justifiably) cite insane valuation levels, shorting a stock based solely on valuation can be a risky endeavor and far from a sure bet. Even if Tesla shares are overvalued, whether or not the market corrects itself is another matter altogether. As the old saying goes: "The market can stay irrational longer than you can stay solvent."

Image source: Tesla.

Personally, I think it's extremely difficult to make a relative assessment of overvalued or undervalued since Tesla lacks comparable peers, even though it's clear that the current valuation is almost entirely predicated on future potential, at a level far greater than the average stock.

As shares rise, two things happen. Shorts continue to lose more, and the possibility of a short squeeze increases if a bunch of them decide to bail. Meanwhile, any further price increases only stretch the valuation even further, potentially emboldening bears further. That's something of a catch-22.

It's pretty tough to bet against a massive story stock that's driven almost entirely by investor sentiment, but that hasn't stopped the bears from trying.

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Evan Niu, CFA owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.