Short sellers have a history of betting against Elon Musk and epically failing, but their latest gamble is paying off and could continue to do so – at least for a while. On The Money has learned.
That would be their increasingly profitable bet against SpaceX, Musk’s futuristic mind-meld that combines space exploration with satellite internet service, plus a heavy dose to AI and social media. Yes it’s a mouthful, and the IPO just a few weeks ago was a hot one – Musk raised $85 billion and the debut price of $135 a share quickly shot to above $175 in the first day of trading.
It’s been downhill ever since. While buy-and-hold investors are taking a beating, SpaceX has become a bonanza for short sellers – investors who make money when stocks fall. As of publication, around 35% of SpaceX’s public shares are being shorted, well above the average of 5%. They’ve been ringing the cash register as shares have fallen 36% from their intraday high.
For obvious reasons, lots of investors hate short sellers for publishing research that sends shares lower. But the market is full of touts, and the practice warns investors where market risks are buried.
SpaceX is filled with risks, if the shorts are right. The growing short “interest” in SpaceX is a “super bearish” sign, says Bob Sloan the founder of S3 Partners, a firm that provides financial analytics to institutional investors to help them position trades. (Bob is also my partner on the “Risk and Return” podcast).
Ok, they’re bearish, but are they right – and for how long? Musk is a brilliant and mercurial entrepreneur who has long attracted critics and naysayers. Recall the disastrous shorting of Musk’s other baby, Tesla. The operative word is “now” because back in 2018, Tesla looked like it was heading for bankruptcy amid questions about its accounting, production timetable, and Musk’s often erratic behavior.
The shorts had a field day – that is, until Musk and his team got their act together. The stock took off eventually, becoming a market darling and leaving the pessimists in the dust.
Sloan’s data suggest that there’s more room for short-term declines. He notes that SpaceX isn’t in the S&P 500 yet, which makes the bearishness even more profound since short sellers are more prone to short shares that appear in the index for hedging purposes.
Meanwhile, SpaceX announces earnings next week on Aug. 4, which will likely be losses. It’s a startup, so that is already baked into its current share price of around $112. What might not be is that two days later the company’s first “lockup” ends, meaning SpaceX so-called insider shareholders (its initial investors) can sell as much as 911.5 million shares – more than the entire float. That will add to the downward pressure.
S3’s research shows the shorts are smelling blood for the lockup ending. Just Monday and Tuesday of this week alone, they’ve added 37.7 million shares to their negative bets.
SpaceX is also getting jabbed by its association with the AI sector, which has been getting pummeled lately by investors skeptical about its past lofty valuations and the growing expense of building all those data centers. The selloff recently smacked a $20 billion hedge fund, Situational Awareness, that had been considered a bellwether of the entire sector.
It’s a good bet that there is more pain to come for SpaceX shareholders, at least in the short term. Still, the short sellers should remember betting against Musk is risky business. If you don’t believe me, look at a long-term chart of Tesla.