Investors betting on a Tesla Inc. slide faced a paper loss of more than $1 billion Tuesday after the stock rallied on Chief Executive Elon Musk’s going-private tweets and email to company employees.
Tesla TSLA, +10.99% short sellers “have taken another body blow to the ribs” and could see their positions “go up in smoke,” said S3 Partners LLC, which tracks real-time short interest data, in a note late Tuesday.
Short sellers were down $1.5 billion in mark-to-market losses Tuesday, bringing August losses to $3 billion, year-to-date losses to $3.2 billion, and losses since 2016 to $6.6 billion, according to the financial technology and analytics firm. Shorts also lost more than $1 billion in mark-to-market losses in a single session last week after Tesla’s earnings report.
Tesla has about $12.8 billion in short-seller interest, behind only Alibaba Group Holding Ltd. BABA, +0.73% world-wide, S3 Partners said.
Read more: A Tesla buyout would be the largest in history — by a wide margin
Short sellers bank on a stock falling in price. They then borrow the shares to sell them, hoping they can later pick them up at a lower price, return them to the original lender and pocket the difference.
Even as Tesla shares are up nearly 30% since last week, when the company reported second-quarter results that boosted the stock higher, shares shorted had not decreased “appreciably,” S3 Partners said, down only 316,000 shares, or less than 1%.
“Even after incurring over $1.5 billion in mark-to-market losses in August, short sellers have kept their positions and conviction,” S3 said in its note. “If Elon Musk does take Tesla private at $420/share, we might actually see a short squeeze in Tesla shares, the Teflon Short can only take so much punishment before it gives in.”
If markets believe that Musk has financing in place and the chances of a buyout are high, “we should see short covering in size, driving Tesla’s stock price higher in the short term as short sellers attempt to close out their positions at lower than the $420 takeout price,” the note said.
Musk midday Tuesday set the market ablaze with a tweet saying he was “considering taking Tesla private at $420. Funding secured.”
See also: Tesla confirms intention to go private, sending stock up 11%
In a series of subsequent tweets he said he’d remain CEO of the company, look out for the shareholders “prosperity,” and that he wouldn’t be selling his shares, to name a few. Tesla shares were halted, and resumed trading around 3:45 p.m. Eastern.
The Twitter volley was initially suspected to be a joke — on April 1, Musk posted a joke about Tesla going bankrupt. Others also zeroed in the “420” number, noting it was a code term for marijuana. But in an email to employees that Tesla posted on its website, Musk expanded on the idea of going private, although he noted that a final decision had not yet been made.
In the email, Musk took a swipe at short sellers: “As the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company,” he wrote.
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Tesla stock closed at $379.57, its highest since a Sept. 18 record high of $385. The shares have gained 22% this year, compared with gains of 7% for the S&P 500 index SPX, +0.28% and 3.7% for the Dow Jones Industrial Average. DJIA, +0.50%