Tesla Plunges with Worst Drop in a Year, Short Sellers Earn $4.3 Billion in a Day, Retail Investors Keep Buying

Tesla (TSLA-US) shares plummeted 14.5% on Thursday (23rd) as second-quarter profits fell far short of market expectations and investors voiced skepticism about the company's artificial intelligence (AI) and robotics initiatives. The sharp decline marked Tesla's largest single-day drop in over a year, delivering a windfall to short sellers.

According to Dusaniwsky, executive director at S3 Partners, the sell-off enabled short sellers to rack up approximately $4.3 billion in paper profits for the day. Around 3% of Tesla's outstanding shares are currently held in short positions.

Following Thursday's plunge, Tesla's stock has declined nearly 30% year-to-date, expanding short sellers' year-to-date paper profits to about $9.08 billion.

Tesla now trades at an estimated price-to-earnings (P/E) ratio of 152x, the highest among the 'Magnificent Seven' tech giants, yet it has delivered the worst performance in the group this year.

James Picariello, an analyst at BNP Paribas, stated: 'As Tesla continues to aggressively pursue its AI goals with a bold capital expenditure schedule, we remain highly cautious about the pace of its AI development. Moreover, the market's current valuation already reflects extremely high expectations.'

He maintains a rating equivalent to 'sell' on Tesla, with a target price of $280.

Tesla's AI controversy differs from that of other large tech firms. While other tech companies face criticism for heavy AI spending without clear returns, some investors worry that Tesla is underinvesting in AI, potentially jeopardizing the commercialization of its Robotaxi autonomous ride-hailing service and Optimus humanoid robot.

Additionally, lower-than-expected automotive gross margins have led the market to question whether Tesla's core business can sustain its future growth ambitions and massive investment plans.

According to S3 Partners data, Tesla has the highest short interest ratio among the 'Magnificent Seven.' Meta Platforms (META-US) ranks second, with only 1.6% of its outstanding shares shorted.

Tesla executives' cautious remarks about Robotaxi during the earnings call may have contributed to the sharp sell-off. A year ago, Elon Musk confidently predicted that the Robotaxi fleet would grow 'far beyond exponential' and reach half the U.S. population by the end of 2025. However, Robotaxi operations are currently limited to a few cities in Texas and Florida, mostly in remote areas.

When analysts questioned the slower-than-expected rollout, the Vice President of Vehicle Engineering explained that Tesla is adopting a phased expansion strategy to meet varying regulatory requirements across cities. The CFO added that the company faces numerous challenges in scaling up and wants to resolve issues in a controlled manner before large-scale fleet deployment.

Retail investors buying against the trend

Not all investors are bearish, however. Patel, a strategist at Vanda Research, noted that Tesla remained the top net-buying stock among retail investors on Thursday, with a daily net purchase of approximately $42 million.

Seth Goldstein, an analyst at Morningstar, believes Tesla's current stock price is undervalued and that its long-term growth momentum remains strong. He stated, 'For long-term investors, we believe this pullback presents a solid opportunity to build a position.' He estimates Tesla's fair value at $450.

Meanwhile, Musk's comments during the earnings call reignited speculation about a potential merger between Tesla and SpaceX (SPCX-US). When asked about the possibility, Musk did not outright dismiss it, saying that 'the overlap between Tesla and SpaceX businesses is growing,' but added that such a discussion cannot take place during an earnings call and must follow proper procedures.

Gene Munster, founder of DeepWater Asset Management, posted on X that before the call, he had assessed the likelihood of a merger at 80%, but after Musk's remarks, he raised it to 90%.