You can forgive short sellers for resenting the gee-whiz technology and improved financials that have electric car maker Tesla Motors (TSLA) suddenly worth almost as much as Mazda Motor (7261). Conventional wisdom says there’s no commercially viable market for ultra-luxury, all-electric vehicles, of which Tesla has just one model. The shorts were hoping for another Fisker, the Tesla rival that has stopped producing cars. You see the
companies mentioned alongside that made-in-America cleantech boondoggle Solyndra.
Against the odds, Tesla’s shares are up 150 percent this year—and 57 percent just this month. The company has added more than $3 billion in market value in just one great news-filled week. In the first quarter of the year, Tesla was North America’s top-seller of rechargeable vehicles, beating both General Motors’ (GM) plug-in Volt and Nissan’s (7201) battery-powered Leaf.
All of which has drubbed those who were betting againstthe Tesla story, now shaping up to be a case study in the dangers of short selling. According to Bloomberg News, shorts have scrambled to buy $276 million of the shares over a week that saw Tesla post its first profit and winraves from Consumer Reports. The 19.7 million shares sold short as of May 13 were down 4 million from May 7, the day before it posted its first profit (PDF). In a short squeeze, those who bet against a stock have to race to buy it back when they are proved wrong and the shares
move higher. Short-selling theoretically entails unlimited downside; while a stock can fall only to zero, there is no limit to how high it can go.
Last week, Tesla posted first-quarter net income, excluding some items, of 12¢ a share, compared with a year-earlier loss of 76¢ and an average analyst profit estimate of 4¢. In his letter to shareholders, Chief Executive Officer Elon Musk wrote: “Importantly, we are seeing orders in a particular region increase proportionate to the number of deliveries, which means that customers are selling other customers on the car. Given that we have not yet delivered any customer cars outside of North America, there would appear to be significant upside potential in Europe and Asia.”