Tesla (TSLA) surged 16% to a one-month high yesterday after reporting mostly encouraging second quarter results on Wednesday afternoon.
Investor sentiment had reached such low levels that it seemed anything short of catastrophic news would lead to a short squeeze -- the typical response we see in the stock following earnings.
Most importantly, Tesla reaffirmed that it would be profitable and cash flow positive in the third and fourth quarters this year. Elon Musk even said Tesla would be profitable and generating cash going forward, unless they pay back a big loan.
Auto gross margins improved sequentially, and Tesla called for Model 3 gross margins to improve to 15% in Q3 and 20% in Q4.
Tesla expects to produce 50-55K Model 3 EVs in the third quarter, which was above estimates.
Two key short theses were Tesla will never be profitable and burgeoning electric vehicle competition will crush them.
The Model 3 is the best selling premium mid-size sedan on the market. While the promise of a $35K vehicle has yet to come to fruition, the dual motor all-wheel drive option is now available which is increasing demand, ASPs and margins.
Cash outflows of $130 improved significantly from $398 million in the first quarter.
Tesla has $2.2 billion in cash and cash equivalents and expects grow that in Q3 and Q4.
Any analyst will say it would be prudent for them to raise cash to reduce balance sheet risk, but it seems Elon Musk wants to achieve profitability via the Model 3 to prove the skeptics and many short sellers wrong.
The myriad of different bear theses we have heard about Tesla over the years did not play out yesterday, and at least some of the ~35 million shares that were short, totaling ~27% of the float, were forced to cover their positions.
While the company looks overvalued based on its current financial picture and the balance sheet adds significant risk to the investment outlook, brand loyalty reminiscent of Apple and arguably the most famous CEO in the world make this a battleground stock of unprecedented proportions.
Tesla also unveiled its own autonomous driving chip that it says will perform 10x better than NVIDIA's system.
There are a lot of smart people short Tesla stock, but it seems unlikely they are smarter than Elon Musk.
The company's $59 billion valuation reflects the future potential of further disruption of the transportation sector.