The Big Tesla Short

The Big Tesla Short

by Gill D on December 05, 2020

Tesla (TSLA) shares dropped 4% on Wednesday after Michael Burry announced that he is shorting Tesla’s stock. Burry is infamously known on Wall Street through his accurate predictions on the subprime mortgage crisis (2007 – 2010) from which he gained high profits.

The crisis was triggered by a massive decline in home prices that led to mortgage defaults, property repossessions, and the depreciation of housing securities. In 2010, Burry said that it could have been predicted by anyone carefully studying the financial markets between 2003 and 2005 as they would have recognized the increasing risk in the subprime markets. Burry was focusing on the subprime market and came to the conclusion that because of the mortgage lending practices that were in play, he could see a collapse of the real estate bubble was coming.

This led to Burry shorting the market and persuaded investment firms like Goldman Sachs to sell him credit default swaps against vulnerable subprime deals. Burry's plan worked out and he earned a significant profit of $100 million while achieving a profit for his investors that exceeded $700 million.

Now on Tuesday, Burry took to Twitter to share advice directly with Tesla CEO, Elon Musk:

“So, @elonmusk, yes, I'm short $TSLA, but some free advice for a good guy....Seriously, issue 25-50% of your shares at the current ridiculous price. That's not dilution. You'd be cementing permanence and untold optionality. If there are buyers, sell that #TeslaSouffle”

The hashtag references an email that Elon Musk sent out on Tuesday to all Tesla employees where he warned that the company’s stock could "get crushed like a souffle under a sledgehammer" unless there was an improvement in profit margins. Burry’s tweet included a spreadsheet comparing Tesla's financial performance against other auto manufacturers. While Tesla has an industry-high market capitalization, its total profits and revenue are well below Volkswagen, Toyota, and other well-established car companies.

Michael Burry’s predictions on the housing market back in 2007 were depicted in Michael Lewis’ 2010 book “The Big Short: Inside the Doomsday Machine,” which was subsequently made into a movie released by Paramount Pictures in 2015.

Burry’s character was portrayed by Christian Bale who was nominated for the Academy Award Best Supporting Actor for his role. The Big Short numerous awards and was named as one of the Top 10 movies of 2015 by the American Film Institute. The New York Times said the movie provided the best explanation of the global financial crisis and movie critics agreed it was shockingly truthful with little dramatization.

Michael Burry first qualified as a medical doctor working as a neurology resident and later a pathology resident at Stanford Hospital. Although he is no longer a practicing physician, Burry retained his medical license and still engages in continuing education requirements.

When he left medicine to start up his own hedge fund investment firm, Scion Capital in 2000. When the subprime mortgage crisis occurred, Burry liquidated his credit default swap short positions in April 2008, and later liquidated his company to work on his own investment portfolio.

Then in 2013, he re-established his hedge fund, called Scion Asset Management, and focuses on investing in gold, farms, and water. He was once quoted as saying, "Fresh, clean water cannot be taken for granted. And it is not—water is political, and litigious."

This year, Burry also made his views known on government policies that included statewide lockdowns in an effort to stop the spread of the COVID-19 pandemic. He said that the imposed lockdowns were in fact more harmful to Americans and the economy than the virus itself.

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