- Tesla's stock rally means some short sellers are capitulating, a factor that is helping CEO Elon Musk get closer to an enormous payday.
- If Tesla's market value stays above $100 billion for a certain amount of time, Musk will earn the first part of a potentially enormous compensation package.
- "The pain trade for the shorts has been a joy ride for Musk," Wedbush analyst Dan Ives told CNBC.
The very short sellers that Elon Musk skewers frequently for betting against Tesla could ironically help the eccentric chief executive score a big payday.
Nearly a fifth of Tesla shares available for trading are sold short, according to S3 Partners. As the shares hit record highs on what seems like a daily basis, more and more of those shorts are forced to capitulate and buy the stock back, fueling the run even further.
This so-called short squeeze has lifted Tesla's stock past a key benchmark: The market value of the company is more than $100 billion. That's a closely watched level because, if Tesla's market cap stays above $100 billion on both a 30-day and six-month trailing average, Musk will earn the first part of a potentially enormous compensation package. Two years ago Tesla's board agreed to a compensation plan for Musk based on Tesla stock milestones. If the shares continue to rally in the next decade, Musk could earn options worth more than $55 billion.
Short sellers borrow shares from an investment bank and then sell them. Their hope is that the stock will go down and then they can buy them back at lower prices and return them to the investment bank, turning a profit on the difference.
But the opposite is happening with Tesla. If a stock price instead trends higher, short sellers are forced to buy back the equity at a higher price in order to cut their mounting losses. If enough short sellers buy in tandem, it can create higher demand and itself drive the equity price even higher, aka a short squeeze.
To be sure, there are fundamental reasons behind the surge. Most analysts point to Tesla's record vehicle production, new factory in China or stabilizing financials for driving the stock higher. But part of the name's rally is coming from shorts forced to "cover" their positions, analysts and traders said.
"The pain trade for the shorts has been a joy ride for Musk," said Wedbush analyst Dan Ives.
Ives, like other analysts, thinks an inflection in demand for electric vehicles has been the major catalyst for Tesla. The stock has had "not just a short squeeze but also fundamental buying," Ives said.
"I've heard from even some of the most bearish, doomsday investors on this and the China thesis has come out of left field much quicker than expected," Ives said. "The pain trade for the shorts is too hard to stomach, as they can't be short going into earnings and with a China inflection point."
Musk has made his disdain for short sellers very well known, going so far as to say that he thinks the practice of betting against a stock should be illegal. He's taken aim at everyone from firms like BlackRock to hedgefund mogul David Einhorn. He's even mocked the Securities and Exchange Commission on Twitter, calling it the "Shortseller Enrichment Commission" – only days after he settled fraud charges the SEC brought against him.
Two years ago, Musk tweeted that short sellers were about to feel the "short burn of the century."
Tesla is expected to report fourth-quarter earnings on Jan. 29.
— CNBC's Tom Franck and Will Feuer contributed to this report.