Tesla (NASDAQ:TSLA) is one of the largest automobile companies in the world, with a market cap of US$537 billion. TSLA stock went public in July 2010 and has since returned an emphatic 13,000% to shareholders, easily crushing broader market returns.
Despite these market-thumping gains, Tesla is often among the most “shorted” stocks in the United States. Basically, short-selling is a trading strategy where you borrow a security and sell it on the exchange while planning to buy back the stock at a lower price. It means that short-sellers expect the share price to fall in the near term.
Tesla is among the most shorted stocks in the S&P 500 index. In April, more than 107 million Tesla shares were shorted, which is around 3.4% of its total outstanding shares. However, Tesla’s stock surged over almost 40% soon after its first-quarter (Q1) results, which led to US$5.5 billion in losses across four trading sessions for short-sellers, according to data from S3 Partners.
In fact, since Tesla has been listed on the stock market, short-sellers have lost over US$65 billion to date. Alternatively, as Tesla stock is down 32% in 2023, profits booked by short-sellers totalled US$4.1 billion in the first four months of 2024.
Despite its outsized gains, Tesla shares are down almost 60% from all-time highs. But it makes little sense to bet against the world’s largest electric vehicle (EV) maker, given its first-mover advantage, expanding addressable market, and strong brand presence.
Tesla’s growth story is far from over
In the last 18 months, Tesla has been struggling with slowing vehicle sales and narrowing gross margins. Due to inflation and rising interest rates, the demand for EVs has fallen off a cliff, forcing legacy automobile manufacturers such as Ford and General Motors to delay their EV expansion plans.
To boost demand, Tesla cut vehicle prices multiple times in recent months, which caused its sales to be down 9% year over year while gross margins narrowed by 200 basis points to 17.4% in Q1 of 2024. The decline in sales and narrowing margins meant Tesla’s earnings fell by 53% to US$0.34 per share in the March quarter. Moreover, Tesla reported a negative free cash flow in Q1, which means it is burning cash to run its operations.
Alternatively, Tesla is an EV giant that sold 1.8 million vehicles and generated US$97 billion in sales in 2023. In addition to manufacturing battery-powered vehicles, Tesla is focused on widening its artificial intelligence capabilities by introducing FSD (full self-driving vehicles).
Here, Tesla aims to eventually roll out a robotaxi that can function without a driver. This ride-hailing service will be in direct competition with incumbents such as Uber. But as the cars will be driverless, Tesla’s profit margins should be much higher, unlocking another multi-billion revenue stream for the company.
Wall Street will closely follow Tesla’s upcoming event in August, as it will provide further insights into its FSD capabilities.
The takeaway
Tesla stock might remain vulnerable in the near term, making it attractive to short-sellers. However, short-selling is a high-risk strategy with the potential for unlimited losses.
Instead, Tesla stock has a good chance of rebounding and delivering stellar returns due to its diversifying revenue base and wider portfolio of cars across price points.
