Is Tesla Really Like Enron?

Could Tesla Inc. (TSLA) be another Enron?

That's the message that short sellers are trying to put out there right now, in the wake of the company's controversial earnings call on Wednesday.

The Twitter sphere went crazy after the call, comparing Elon Musk calling an analyst's question "boring" and "bonehead" to Enron CEO Jeff Skilling calling a fund manager an "asshole" on an analyst call.

Noted Enron short-seller Jim Chanos has said repeatedly that Tesla is worth zero, making Enron references with aplomb. And he's reportedly been short the stock for the last four years.

The Tesla and Enron comparisons might be a bit stretched, though. As the data show, Tesla is far from a high-probability short right now. Quite the contrary.

There are plenty of well-reasoned rationales for going short Tesla. But, as I've been pointing out recently, the exceptionally high level of short interest in Tesla and abundance of high-emotion bets should really be a cause for concern for bears' short thesis. The asymmetric characteristics of short bets, exceptionally high short interest, and stock-borrow financing costs mean this is a riskier stock to short than to buy right now.

Simply put, being bearish on Tesla is a crowded trade in a way that Enron never was.

Source: Bloomberg
Source: Bloomberg

By the time Enron had already fallen 90% from its high-water mark, short interest made up just 4% of outstanding shares. At that point, the SEC inquiry was already public, CFO Andy Fastow was already ousted, and the company had restated 4 years of earnings to account for massive losses.

Enron becomes an obvious short with the benefit of hindsight; but in real-time, it was clearly less obvious to most market participants.

Today Tesla has approximately four times as much shorting activity right now as Enron during the depths of its crisis.

Frankly, what we're seeing in Tesla right now is a very rare event. Over about two decades, only a handful of stocks with a market capitalization of $20 billion or more have simultaneously had at least 20% of their outstanding shares shorted.

VMWare Inc. (VMW) is the one perennial member of that group alongside Tesla. Shares of VMWare are up 44% in the last year, and 142% in the last two years.

Other large-cap stocks that have had similar levels of extreme shorting include Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio holding Alphabet Inc. (GOOG) (GOOGL) (then Google) back in late 2004 - shares rallied 112.5% in the year that followed.

And Comcast (CMCSA) back in 2002 - when its 14% rally over the next 12 months dramatically outperformed a double-digit decline in the rest of the S&P 500.

Who knows, maybe Tesla becomes one of the first large-cap stocks where a record number of short sellers got it right. Or maybe not.

The good news is that we'll find out sooner rather than later.

Lots of the arguments that Tesla is structurally unprofitable are going to be tested later this year: Elon Musk has guided for profitability in Q3 and Q4.

Meanwhile, the technical price action doesn't support being a buyer here, at least not yet. If you're looking for a high-probability bet on Tesla, your best move is still to sit on the sidelines and watch the drama unfold.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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