Tesla Smashes Earnings And Revenue Expectations

Tesla Smashes Earnings And Revenue Expectations
businessinsider.com

Trading outside these regular hours is not a new phenomenon but previously was limited to high net-worth investors and institutional investors like mutual funds.[2] The emergence of private trading systems, known as electronic communication networks or ECNs, has allowed individual investors to participate in after-hours trading.

In other words, nothing unfair about it.

In the case of TSLA the stock, as of Apr 15, almost 31 million shares were lent out to short sellers ("sold short"). That is out of 72 million shares on the market ("float"). At an average volume of 3 million shares traded per day (trailing 3 month average) it would take more that 10 trading days of nothing but short sellers buying shares on the open market to return to the people they borrowed them from ("cover").

Short trading unhedged is regarded as dangerous for this reason. If you buy a stock in the traditional way, if it goes to zero you only lose your investment. If you sell a share short, your losses (amount you have to re-buy it for minus the price you sold it for) is unbounded. Typically, this isn't collateralized by cash, but in money that brokers loan to traders ("margin"). If a broker sees that I have a really, really big loss on a short position, they might make me repay that money ("issue a margin call")... and depending on the situation, that might force a trader to cover their short position.

Anyway, point is that this can lead to a bunch of short sellers driving up the price of a heavily short stock all at once because they've either decided to cut their losses or because of margin calls, called a "short squeeze". This usually isn't sustainable because it's a temporary supply/demand imbalance. Could be an tough day for a lot of people investing against Tesla tomorrow, but I wouldn't bet on the gains in TSLA the stock tomorrow/in after-hours trading lasting for a long time.

High-Level Summary:

There was a ton of short-selling interest on TSLA (due to expectations of a big earnings miss). Almost 27% of the 115mm shares outstanding are currently being borrowed by short sellers. TSLA has more short interest by percentage than 98% of US stocks. Everyone was really expecting the price to go down.

Tesla reported earnings today at $.12/share, and upped their forward guidance. The consensus earnings estimates were $.04/share, so TSLA greatly surpassed expectations.

To short a stock, you have to borrow a share from someone else, and then return that stock to them at a later date. Returning the stock is called 'Covering a short'. All those people who were betting against TSLA are now forced to pile back into the market to cover, but since so many shares were short to begin with, the number of people who have stock to sell is much lower than typical.

This results in a 'short covering rally' where there is a lot of demand to buy shares and a small supply. Econ. 101 takes over and you see a big spike in the price.