Michael Burry Backs out of Tesla Short

Was come out in the media over the past week that Michael Burry has ditched his short position against Tesla. So, another big name investor has tried to bet against Elon Musk and has run for the exit. However, unlike many others, there's a good chance Michael Burry got out of this bet unscathed and may have even made a decent profit from it.

So, in this video, we're going to talk about why Michael Burry took this bet, what the likely outcome was for him, and the dilemma with betting against Tesla stock in general. So, with that said, let's get started.

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So, Michael Burry, for those that don't know, is an investor that's pretty darn good at predicting bubbles. Most people know him from "The Big Short," as he was one of the people that saw the U.S. housing bubble brewing in the early 2000s. In fact, he was probably one of the first to see it, as he was making bets against the housing market like a few years before it actually popped. He made approximately 700 million dollars from that bet.

But, you know, it wasn't a once-off thing. For example, even earlier this year, he placed a big bet on inflation by betting against the 20-year treasuries. Sure enough, inflation hit hard, the treasuries went down, and Michael Burry capitalized. So, Burry has this knack of finding bubbles and then betting against them.

It was in Q1 2021 that he started betting against Tesla stock by buying put options. He bought puts against 800,100 Tesla shares. This means that if Tesla's share price fell below the put options' strike price, then Burry would be making money. Because remember, put options allow Burry to sell the stock at the strike price before the expiry date.

So, if the share price falls, he could buy the shares on the open market for less and then sell them to the option writer for more. However, the annoying thing for us outsiders trying to look in is we don't actually get to know what the strike price was or the expiry date of the options that Michael Burry bought.

Frustratingly, this means it's very difficult for us to gauge whether Burry made money or lost money on this bet. But the facts that we do have is that he bought some puts in Q1, which means he bought them at some stage between, you know, share price of 563 dollars and 880 dollars per share.

Then, in his Q2 filing, it also showed that he had puts against one million seventy-five thousand five hundred Tesla shares. So, as of the first of July, thus a lot of them would have been bought when the share price was somewhere between seven hundred and sixty-two dollars and five hundred and sixty-three dollars.

Honestly, this makes it quite difficult to really know how much he's made or lost because again, we don't really know the expiry date of those options. For example, were the options he held at the end of Q1 the same options he held at the end of Q2? We just don't know.

So, because we don't know the expiry date of the options or the strike price, it really is quite tricky to know how this played out for certain. But, you know, just looking at the stock price, my best kind of guess I suppose would probably be that he's made money on this trade.

Why, you might ask? Well, Michael Burry has recently said that he's no longer betting against Tesla, so he's already out. He also said that it was more of a trade than anything else. And as we know, trades are short term, and during the time frame in question, you know, for most of it, Tesla stock was actually trending down.

I mean, it went down pretty much all of Q1, and it went down for a good chunk of Q2 as well. So, if he was placing short-term, you know, option trades during that time, then chances are he was making money. If, you know, by chance he was just holding slightly longer-term in the money options, then he would have been able to see the slow rebound of the stock price, and he could have seen that coming and just left it anytime to collect a profit.

So, although the headlines are reading that Michael Burry was defeated and so on, I actually think there's probably a good chance he may have profited from the bet. But again, I don't know, that really is a guess. We just don't know the strike price or the expiry dates of the option, so we can't be certain.

So, with that said, I now wanted to discuss why Michael Burry would have done this and also why, in general, it's very scary to bet against Tesla.

So, firstly, why did he do it? Why did he bet against Tesla? Elon Musk seems very risky. Well, it's important to understand that Michael Burry really wasn't making a bet against Tesla the company. That's the first thing to understand. It seems like Michael Burry is actually a fan of Elon Musk, having spoken of him in a positive light in the past.

But beyond this, we also have to remember that Michael Burry has said in his own words that this was a trade. Trades are short term in nature. He used put options. Options are short-term in nature. If he wanted to make a long-term bet against the company, he would have shorted the shares. He would have been a short seller; then he could have left his short position open indefinitely, hoping for a time when, you know, Tesla might crash and burn at some stage in the next, say, 10 years.

But he chose to instead use put options, which have an expiry date. To me, this means he wasn't making a long-term bet against the business; rather he was making a short-term bet against the stock price. You know, he wasn't Gordon Johnson shouting from the rooftops that Tesla is a busted growth story. He simply made a short-term bet the share price was worryingly high versus the current business performance.

And, you know, if you look at the company from that lens, then Burry is absolutely right. I mean, I am a Tesla shareholder myself, and I agree that if you just look at where the business is at this moment in time, right now, then it looks like the most expensive stock you'll ever see.

I mean, in the last quarter, they generated what? 1.3 billion in free cash flow. If you annualize that to 5.4 billion of free cash flow, then look at their market cap: 885 billion. That's a price to free cash flow of 164. Imagine waiting 164 years to get your money back as a business owner.

So, I can understand why Michael Burry took this bet. The price definitely is severely detached from where the business currently sits. But, and this is why it's so hard to bet against Tesla generally, Tesla has, I'd say, more future growth potential than any business I've ever seen.

You know, cars, batteries, electric powertrains, full self-driving, vision-based AI, solar grid scale storage, power management software, robotics, manufacturing—really, with Tesla, the list goes on. Because they have so much future growth potential, that gets reflected in the share price, making it look incredibly high for where the company sits right now.

But if they can capitalize and become a big player in a few of those business segments over the next 10 years, then the stock price is more than justified. Even if they become the world's leader in self-driving cars, you can argue that the stock price already is justified. That fact alone would make me very nervous to be a short seller, and that's why so many people have already failed betting against Tesla.

They come in from, you know, a traditional Wall Street approach of Tesla is a car manufacturer with a P/E of 467—that's absurd. Then they get burned when they realize that Tesla has a much bigger future than just a car company. They get burned when they realize Tesla's potential in all these other business segments is why the stock price keeps rising.

So, it's an incredibly hard stock to bet against, you know, not to mention the company is led by one of, if not the best engineering minds in the world. You know, the company has a cult-like following these days; they aren't even reliant on external capital. So, there's a lot of factors to consider.

But anyway, I hope that explains both why, you know, Michael Burry took the bet but also why, personally, I would never bet against Tesla—really at any price. For Michael Burry, he wasn't really betting against the company like a lot of the short sellers are; he was just making a short-term bet against the stock price, which, you know, actually probably worked out for him.

But anyway, guys, that will do us for this video. Let me know what you think in the comments. You know, would you ever have the guts to bet against Tesla shares? I mean, I don't think I would personally, but you never know. Maybe if you have bet against Tesla shares, let me know in the comment section below.

It's a very interesting situation. I'd love to hear your thoughts on, you know, whether you feel Tesla's market cap is justified considering the moves they're making in all those other business segments. Like, forget where the company is right now; where they just, right now, they're just selling cars. But think long-term.

I'd love to hear your thoughts with the ideas of, you know, full self-driving and manufacturing and AI and robotics and all that. Do you feel like one day Tesla could grow into and go past its current kind of market cap and stock price? I'd love to hear from you guys. That'd be really interesting.

So, let me know what you think down in the comment section below. But guys, that will do us for today. Leave a like on the video if you did enjoy it or if you found it useful. Subscribe to the channel if you haven't done so already. Subscribe to New Money Clips for short form new money content. Check out profitable links down in the description for how I go about my investing—full in-depth step-by-step courses.

But guys, that will do us for today. Thank you very much for watching, and I'll see you guys in the next video.

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