Tesla Inc (NASDAQ:TSLA) stock tumbled another 4% on Tuesday after a long-time bear built a case for it to slide even further. He feels a Tesla bankruptcy is imminent. Although TSLA remains above where it was this time a year ago, short-sellers see it falling even further. The automaker’s junk bonds are being heavily shorted as well, and more and more reports indicate that sentiment on Tesla stock is shifting heavily toward the bearish side, although one bull doesn’t think that’s necessarily a bad thing.
Hedge fund manager believes Tesla bankruptcy is near
ValueWalk obtained an email sent by Vilas Capital Management manager John Thompson to clients over the weekend, in which he explained why he thinks bankruptcy will be a reality for Tesla within the next three to six months. In a follow-up interview, he told MarketWatch that he sees Tesla filing for bankruptcy within the next four months—unless its celebrity CEO Elon Musk “pulls a rabbit out of his hat.”
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In the email obtained by ValueWalk, he said that Tesla is “without any doubt, on the verge of bankruptcy” and that he has “suspicions of fraudulent accounting activities, evidenced by 85 SEC letters/investigations and two top finance people leaving in the last month.” He also told MarketWatch today that the automaker has “one of the worst income statements” he has ever seen.
Short of Tesla stock about to pay off?
Tesla stock has been riding on the company’s story for years, but Thompson warned that eventually, the financials are going to win out, and he’ll be ready when they do. His short of Tesla stock is the largest position in Vilas’ $25 million in assets under management. He has been selling TSLA short for years—making him a long-time “jerk” in Musk’s book—so his fund has gone through some very difficult times. ValueWalk outlined his short thesis about a year ago.
Thompson believes his short bet against Tesla stock is close to paying off, and when or if it does, the value of his fund could skyrocket by up to 50%. As a result, he’s sinking in half a million dollars of his own money. In a weekend email to his firm’s clients, he explained why he’s so sure that TSLA is “on the verge of bankruptcy.” He expects the Model 3 production problems to continue while demand for the Model S and Model X declines. He also predicts that Moody’s will downgrade the automaker’s credit rating from B- to CCC.
TSLA bonds are heavily shorted too
It isn’t just Tesla stock that’s being mauled by bears right now. The company’s bonds are also being eaten up by short-sellers. IHS Markit revealed on Monday that 99% of the lendable supply to short Tesla junk bonds has been borrowed, and investors who are shorting them haven’t even started covering to lock in some profits. This suggests that Thompson isn’t the only one who believes Moody’s will downgrade Tesla’s credit rating soon.
According to IHS Markit director Sam Pierson, short interest in Tesla stock is also up after climbing to 17.9%. It now amounts to almost $8.7 billion, making Apple the only other stock with a higher short balance, at $9.7 billion.
Tesla perma-bull: negative sentiment can be a good thing
InvestorPlace analyst Serge Berger also said this week that he’s finding more and more signs that sentiment on Tesla stock is shifting further and further into bearish territory. He noted a marked increase in “bearish talk and positioning in TSLA in recent months,” particularly as concerns about cash burn continue to grow.
But despite all the bearish talk and concerns about Tesla filing for bankruptcy, Baird analyst Ben Kallo actually likes the set-up going into the release of the first-quarter delivery numbers, which is expected in early April. He noted that delivery expectations are low due to the pessimism around Tesla stock. Although he doesn’t think the automaker will be producing 2,500 Model 3 cars weekly by the end of the quarter, he does believe it will “within weeks.” He expects Tesla stock to “react positively” to the delivery release because he thinks sentiment has gotten “overly negative,” which means the company could beat expectations.
Kallo slashed his delivery estimates for Tesla. He now pegs the automaker deliveries at 10,000 Model S sedans, 10,000 Model X SUVs, and 8,000 Model 3 cars.
TSLA stock plunged by nearly 4% in intraday trading on Tuesday, falling as low as $285.25 per share.