Short sellers triumph as Wirecard collapses – but who’s next?

CFD Trading
Equities

Those shorting Wirecard will have been rubbing their hands with glee after the events of the past few days.

The company, once one of Germany’s tech darlings, last week filed for insolvency after admitting that almost €2 billion in cash missing from its balance sheet likely didn’t exist.

In the space of 11 days the stock price collapsed from just over €100 to as low as €1.15. In the week ending June 26th, Wirecard short sellers made $1.2 billion, with hedge funds accounting for the bulk of that.

Wirecard has been a heavily-shorted stock for a long time, thanks in part to negative coverage by the Financial Times, which has long warned that the company’s finances don’t add up. The stock was so heavily shorted that in February the German financial regulator took the unprecedented step of banning new short positions on Wirecard for an entire month.

Wirecard stock is a fraction of its former value after the 95% drop witnessed over the past 12 days. While hedge funds are still piling in to short the stock, many shorts have already locked in their profits. So what might be the next big target for short sellers?

GSX: Inflated revenues and fake users?

GSX Techedu is a tech company and online education provider focusing on after-school tutoring for primary and secondary school children, as well as courses in foreign language, and professional development amongst others.

The company has been the focus of short sellers for some time now. As of mid-May over a fifth of its publicly traded stock was sold short – 27.3 million shares, worth $815 million at the time. This makes GSX the fourth largest Hong Kong or Chinese equity traded short on US exchanges after Alibaba, Pinduoduo and JD.com.

The company faces claims from Citron Research and Muddy Waters that it has inflated its revenue figures. Citron, which has called GSX “the most blatant Chinese stock fraud since 2011”, has questioned the 431% year-on-year revenue surge reported by GSX in 2019. Additionally, Muddy Waters believes that around three quarters of the company’s reported students are actually bots rather than paid users.

GSX listed on the New York Stock Exchange on June 6th 2019 with an initial offer price of $10.50. The stock is now trading at around $58, and has surged 146% this year.

You can trade this hotly-watched stock on the Marketsx platform.

Tesla shorts down but not out

Tesla founder Elon Musk has been battling against short sellers for a long time. The huge rally seen in the stock price in recent months, while dealing a painful financial blow to short sellers, seems to have only hardened their resolve. Back at the end of January, a stronger than expected earnings report from Tesla saw shorts lose $1.5 billion in a single day. Then, at the beginning of March as the pandemic panic set in, Tesla’s tumble netted shorts $2.8 billion.

Tesla is the most shorted US stock, with the value of its float out on loan rising around $3 billion in the last two months to over $16 billion. That’s around 11% of its publicly available stock. The stock recently rose to trade above $1,000 per share for the first time, helped by resilient demand for its vehicles in China and progress towards a one million mile battery, which could revolutionise the electric vehicle market.

However, shorts believe there is still a large disconnect between where the stock is now and the fundamentals of the company – it went public ten years ago and, while the stock is up over 4,000% since then, Telsa has never delivered a full year of profitability. Shorts are betting that a lot of the recent gains seen in Tesla stock is because of momentum traders, and that the bubble will eventually burst.

Will Hammerson follow Intu into administration?

In the UK, shopping centre owner Hammerson attracted a lot of attention from short sellers during the height of the pandemic panic in March. It’s the most shorted UK stock, with 13% of its publicly traded shares out on loan. A total of nine hedge funds are betting against the stock, as the impact of the lockdown to battle Covid 19 and the prospect of a sluggish reopening hampered by social distancing measures, threatens the outlook for the company.

Rival Intu, owner of some of the UK’s largest shopping centres, entered administration this month. The company was already heavily laden with debt, and the coronavirus pandemic proved to be the final straw.

The fate of Intu shows just why short sellers are interested in Hammerson: as of the end of last week the collapse in its stock price left Intu valued at just £16 million, down from £13 billion in 2006.

While Hammerson raced higher from its mid-May low as its tenants prepared to reopen their stores, the stock has since lost nearly half its value again.

Where next for TSLA after Musk’s ‘price is too high’ tweet?

Equities

Tesla CEO Elon Musk knocked $14 billion off the value of his own company on Friday after tweeting that he thought the stock price was too high.

Musk posted “Tesla stock price too high imo” during a bizarre tirade of messages, that included railing against lockdown and sharing lyrics to The Star Spangled Banner. TSLA dived over 12% in response.

Musk is no stranger to expensive tweets. He had to pay the US Securities and Exchange Commission $20 million in 2018 after posting that he was planning on taking the company private again. He suggested a premium of $420 and that funding for the move was secured, causing the stock to leap over 6%.

The SEC alleged that, “in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.  Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.”

Tesla was also required to pay a $20 million settlement, remove Musk from the board, and implement new procedures and controls with regard to the CEO’s Twitter account. An in-house lawyer for Tesla is supposed to approve his tweets relating to company financial matters.

Musk breaks SEC settlement guidelines with TSLA tweet?

These controls clearly weren’t working too well on Friday – in response to an email from the Wall Street Journal asking if the messages had been authorised or vetted, Musk simply replied “No”.

Is Musk facing another spat with the SEC? Potentially. It’s unclear whether commenting on the stock price counts as a ‘financial matter’, and therefore whether it should have been vetted before it was posted. However, if the SEC deems that it does count, Tesla’s board of directors could also be in trouble, as it’s the company’s responsibility to see that these compliance procedures are followed.

A small fine here or there is nothing a billionaire need concern himself with, but the danger for shareholders is that the CEO and the board need to be on top form during these extraordinary times. The last thing a company like Tesla needs is for its CEO to be fighting with the US authorities – or the board of his own company.

Where next for Tesla shares?

Tesla shareholders have always had to contend with Elon Musk’s erratic behaviour.

In October 2013 he claimed “the stock price that we have is more than we have any right to deserve” while opening a new showroom in London. He told reporters in September 2014 that “I think our stock price is kind of high right now, to be totally honest”.

In February 2015 Musk took a different angle, claiming that Tesla could reach the same market capitalisation as Apple had ($700bn at the time) within 10 years. He repeated the claim in May 2017, but a couple of weeks later was back to stating that the current market cap was “higher than we have any right to deserve”.

Even if Musk and Tesla escape repercussions from the latest tweet, this is just the latest in history of tweets from the CEO on the company’s share price. Traders and investors need to be prepared for unexpected surprises.

Find the latest Tesla ratings with Analyst Recommendations

Tesla currently holds a consensus “Neutral” rating amongst Wall Street analysts and the average price target of $621.33 represents a 14% downside on the current share price.

Many analysts updated their ratings on Tesla on April 30th – the day before Musk’s tweet about the share price. Check the Analyst Recommendations tool to see whether the CEO’s comments change the view on the Street.

CySEC (EU)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to EUR20,000
  • Negative Balance Protection

Products

  • CFD
  • Share Dealing
  • Strategy Builder

Markets.com, operated by Safecap Investments Limited (“Safecap”) Regulated by CySEC under License no. 092/08 and FSCA under Licence no. 43906.

FSC (GLOBAL)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Products

  • CFD
  • Strategy Builder

Markets.com, operated by TradeTech Markets (BVI) Limited (“TTMBVI”) Regulated by the BVI Financial Services Commission (‘FSC’) under licence no. SIBA/L/14/1067.

FCA (UK)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to GBP85,000
    *depending on criteria and eligibility
  • Negative Balance Protection

Products

  • CFD
  • Spread Bets
  • Strategy Builder

Markets.com operated by TradeTech Alpha Limited (“TTA”) Regulated by the Financial Conduct Authority (“FCA”) under licence number 607305.

ASIC (AU)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Products

  • CFD

Markets.com, operated by Tradetech Markets (Australia) Pty Limited (‘TTMAU”) Holds Australian Financial Services Licence no. 424008 and is regulated in the provision of financial services by the Australian Securities and Investments Commission (“ASIC”).

FSCA (ZA)

  • Clients’ funds kept in segregated bank accounts
  • Negative Balance Protection

Products

  • CFD
  • Strategy Builder

Markets.com, operated by TradeTech Markets (South Africa) (Pty) Limited (“TTMSA”) Regulated by Financial Sector Conduct Authority (‘FSCA’) under the licence no. 46860.

Selecting one of these regulators will display the corresponding information across the entire website. If you would like to display information for a different regulator, please select it. For more information click here.