Tesla Short Sellers Take $1B Hit, 'Short Squeeze Hell' Could Be Coming

It’s been a rough year for Tesla Inc TSLA investors, with the stock down more than 22% year to date overall even after a big 9.8% gain on Thursday following a second-quarter earnings beat. While Tesla bulls celebrate the long-awaited good news, Tesla short sellers are getting torched.

Massive Profits Wiped Out: Heading into earnings, Tesla had been one of the most profitable short trades in the market in 2022, scoring short sellers a $7.35 billion year-to-date mark-to-market profit. However, Tesla short sellers endured $1 billion in losses in early Thursday trading, according to S3 Partners analyst Ihor Dusaniwsky. He said Tesla short sellers have now endured $2.6 billion in losses in the month of July, making it the least profitable short in the market for the month.

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Tesla is the most heavily shorted equity in the world with $18.5 billion in short interest. Only Apple Inc AAPL is a distant second with $17 billion in short interest.

Fortunately for Tesla shorts, many of them locked in their profits prior to Thursday, with 2.09 million short shares covered in the past 30 days. In the past week, S3 reported that 1.2 million Tesla short shares have been covered ahead of earnings. Short interest now represents 2.8% of Tesla’s public float.

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Short Squeeze Coming? Tesla shorts are feeling the pain, and Dusaniwsky said the short covering trend may continue following Thursday's big rally.

“The end of 'supply chain hell' may turn into a 'short squeeze hell' for TSLA short sellers as Elon Musk says the firm has the 'potential for a record-breaking second half of the year.'” Dusaniwsky said.

He said the large Thursday losses may force Tesla short sellers out of their position whether they want to exit or not.

"These buy-to-covers and the potential for hedge funds to bulk up their positions in a high beta name with a positive price trend may help reverse TSLA’s year price weakness," Dusaniwsky said.

Following Thursday's gain, Tesla shares are now up 24.3% overall in the past 12 months while the SPDR S&P 500 ETF Trust SPY is down 8.2% in that time.

Benzinga’s Take: The earnings report was a big positive for Tesla, but it was likely not enough to change many short sellers minds. Many Tesla short sellers are simply skeptical of the stock's extreme valuation premium relative to other auto and large cap tech stock peers.

Photo: Vadym Pastukh via Shutterstock