Tech short-sellers make $12bn betting against Tesla in 2022

As a bull market turned bearish in 2022 amid soaring inflation and rising interest rates, investors made $50bn from short-selling tech stocks. Tesla, which has seen its share price plunge, topped the list, with Amazon, Meta, Apple and Microsoft all featuring in the top 10.

- Short-sellers have banked $49.2bn of gains from Big Tech in 2022

- The most shorted stock was Tesla, which lost half its value but delivered nearly $12bn profits to short-sellers

- AdvisorShares Ranger Equity Bear ETF up 15.9% year-to-date

Short-sellers have made almost $50bn betting against tech giants this year, according to data released this month. Shares of electric car maker Tesla [TSLA] were the most shorted and generated the most profit at $11.7bn, S3 Partners said.

Amazon [AMZN] was in second place with $6bn of profits, and Meta Platforms [META] just behind at $5.7bn. Used-car retailer Carvana [CVNA] was number four on the list with $4.3bn. The top 10 also included tech names Block [SQ] at $4.1bn, Apple [AAPL] at $3.9bn and Microsoft [MSFT] at $3.7bn.

Amid tough macroeconomic conditions, 2022’s tech selloff has seen stock prices slide. Tesla stock peaked in November 2021, reaching the $409 mark, but has more than halved since then, making it ripe for short-sellers. 

Amazon’s share price has slipped 47.3% year-to-date and Meta’s has slipped 64.5% over the same period. Carvana stock is down 97.8%, Block 61.3%, Apple 23.8% and Microsoft 26.6%.

Short-sellers have also targeted firms related to cryptocurrencies, including Coinbase [COIN] as the FTX exchange collapsed. Data from S3 showed short positions in crypto stocks are nearly three times higher than others, while short sellers pay 11 times more to bet against them. 

How tech stocks lost their appeal

The tech-heavy Nasdaq 100 Index has tumbled by a quarter in 2022. Despite this correction, many leading tech stocks are still regarded as overpriced when compared with their estimated sales or earnings — following years of bullish sentiment.

As a result, the tide has turned. “The reason we are so attracted to the technology sector is because there are still a ridiculous amount of companies out there that are trading at 10, 15, 20 times price to sales,” said Brad Lamensdorf, manager at the AdvisorShares Ranger Equity Bear ETF.

It’s a big turnaround from 2020 and 2021, when short positions on Tesla led to losses of $40.7bn and $10.3bn, respectively. Data from Vanda Research show investment portfolios belonging to retail traders lost $350bn in 2022 —Tesla shares account for around 10% of such portfolios.

As well as supply-chain issues and the wider macro situation, Tesla’s stock has been battered by CEO Elon Musk's headline $44bn purchase of Twitter. Dan Ives of Wedbush Securities recently took Tesla off his "best ideas list" — though retained a ‘buy 'rating on the stock, while his $300 price target would be a 50% increase from its last close.

Tech stock selloff brings short-sellers back to the market

Short-selling is when investors borrow shares then sell them, intending to buy the stock back at a lower price and profit from the difference. It is regarded as a risky investment strategy but can lead to gains during a bear market, when share prices are falling.

The practice fell out of fashion during the bullish market of the last few years, but has returned as high inflation and rising interest rates bed in.

But while the tech selloff this year has been hard and fast, the Nasdaq 100 still trades at around 21 times forward earnings, still higher than its 10-year average. Therefore, some analysts forecast further profits in 2023 for short-sellers continuing to bet against tech firms.

Matt Maley, chief market strategist at Miller Tabak and Co., told Bloomberg he believed this would be the case, saying: “History tells us that bear markets for the tech group do not end until the biggest names become at least somewhat cheap.”

Funds in focus: AdvisorShares Ranger Equity Bear ETF

The AdvisorShares Ranger Equity Bear ETF [HDGE] is a fundamental short-selling fund that uses “forensic accounting-based methodology to uncover securities with earnings quality deterioration”. 

Coinbase is number two in the fund with a weighting of 2.8% in the portfolio. Year-to-date, the fund has increased by 15.9% to the close on 16 December.

ETFs with the most exposure to Tesla include the Consumer Discretionary Select Sector SPDR Fund [XLY], where the stock is the second-largest holding at 13.2% of the portfolio. Amazon — 2022’s second-most shorted stock — has the largest weighting in the fund with a share of 18.64% as of 14 December. Year-to-date, XLY has lost 34.1% of its value.

There are also ‘inverse exposure' ETFs that track benchmarks such as the ProShares Short UltraShort S&P500 [SDS], which seeks to “help hedge against an expected decline” and “profit from a market decline”. SDS is up by 29.9% year-to-date.