Shares of Netflix, Inc. (NASDAQ:NFLX) were up nearly 25% on April 23 after the growing company reported better than expected earnings. This is not the first time Netflix shares have surged after positive results. Shares gained over 42% on Jan. 24 after the company reported a surprise profit. What did these two gains have in common other than a basis in tangible news? Short sellers of the stock got burned and were forced to buy shares in large numbers.
This event where short sellers are forced to cover their short positions by becoming buyers is known as a short squeeze, and it often has the result of driving shares well beyond typical levels. Short squeezes usually happen to companies with a high percentage of shares sold short or an extremely tightly held supply of shares where demand for shares to cover exceeds the supply of shares available at a reasonable price. Here we will take a look as to whether shares of Tesla Motors Inc (NASDAQ:TSLA) could be in for a similar short squeeze.
A company with such a radical business plan as Tesla is bound to attract more than its fair share of bears who consequently short the stock. For March 28 (the latest data available on NASDAQ.com), the short interest for Tesla stood at just over 31 million shares or about 43% of the float. With so many shares sold short, many investors could be expecting a short squeeze.
This could have multiple effects. If those who are bullish already expect a short squeeze, they may increase their positions, thus adding more buying pressure to the stock. Those short the stock may also see a short squeeze coming and begin to cover their position as the stock rises. However, like the bullish buying, covering shorts adds buying pressure to the stock and drive up the share price.
Tesla Motors Inc (NASDAQ:TSLA) is one of only a few automakers that is in a likely short squeeze position. Companies like General Motors Company (NYSE:GM) and Toyota Motor Corporation (ADR) (NYSE:TM) are usually too big with too few shorted shares for a short squeeze to grab hold. However, Volkswagen Group AG proved a notable exception to this rule when short covering, caused by PORSCHE AUTO ADR (PINK:POAHY) revealing it had nearly cornered the market in Volkswagen shares, briefly made Volkswagen the most valuable company in the world. Shares of Volkswagen were briefly driven to more than 1,000 euros each as hedge fund managers short the stock moved to cover in a market where demand was high and supply was almost non-existent.