Elon Musk Says the Short Sellers Betting Against SpaceX Have a "Very Low" Survival Probability. Their Bets Now Equal 32% of the Float.

"The survival probability of firms who maintain a significant short position in SpaceX over time is very low," SpaceX (NASDAQ: SPCX) CEO Elon Musk wrote in a post on X last week. "I said SpaceX will be worth more than Earth if we achieve our goals. Obviously true."

About 206 million SpaceX shares are now sold short, according to estimates from S3 Partners. That's roughly 32% of the company's publicly tradable shares, and about $25 billion in bearish bets. The position is growing fast, too: The short count is up from about 185 million shares just last week, and a month ago the estimate was around 40 million shares.

The market took its time coming around. Shares rose about 3% on Tuesday to close at $123.46, snapping a seven-session losing streak.

So are the short sellers really trapped? Or is a one-day bounce in a stock trading about 45% below its post-IPO high just short-term covering?

Image source: Getty Images.

The bet against SpaceX got crowded fast

The short position didn't build slowly. S3 said short sellers have been adding exposure ahead of several key catalysts, including the company's first earnings report as a public company and the lock-up expirations that follow it.

That report now has a date. SpaceX has confirmed it will release its first quarterly results after the market closes on Aug. 4. Lock-up restrictions begin expiring shortly after, which could put a wave of insider shares on the market for the first time since the company's June initial public offering (IPO).

The stock's slide explains the bears' confidence. SpaceX went public at $135 per share, briefly traded as high as $225.64, and closed Monday at $119.85, a new low.

And the fundamentals give skeptics something to work with. The company generated about $19 billion of revenue over the trailing 12 months, up 33% year over year. That's impressive growth, but it's attached to a market capitalization of about $1.6 trillion. The stock trades at more than 80 times sales, and the business is still losing billions of dollars a year.

The debate was never about whether SpaceX is impressive. A company growing 33% at this scale clearly is. The debate is how much of that future a $1.6 trillion market value already prices in.

What would actually force a squeeze

A short squeeze needs more than a big short position. It needs shorts who are forced to buy back shares (because borrowing costs spike, losses pile up, or a catalyst destroys the downside case), and a thin supply of shares available for buying makes the scramble worse.

Some of those mechanics are arguably present here. A third of the tradable float sold short is an extremely crowded bet. And the Aug. 4 report could force a scramble to buy back shares if results impress.

However, one mechanical detail works in the shorts' favor: The float is about to grow. SpaceX's publicly tradable float is only around 640 million shares, or roughly 5% of the more than 13 billion shares outstanding. As lock-ups expire in the months after the earnings report, that float should expand dramatically.

More supply makes shares easier to borrow and easier to buy back. That's the opposite of a trap tightening.

So Musk may be right that betting against SpaceX is dangerous over time. But the shorts aren't cornered the way the 32% figure makes it look.

Whatever the case, investors choosing to short the stock should be cautious. A squeeze could send shares sharply higher in the near term. With this much of the float sold short, rallies in a heavily shorted growth stock can feed on themselves.

But a squeeze is a trade, not an investment thesis. Nothing about Tuesday changed what the company earns or what it spends.

For me, the more useful event is two weeks away. The Aug. 4 report will give investors their first real look at SpaceX's financials as a public company. In the meantime, I'm not betting with the shorts against a company growing 33% a year and with a massive long-term runway. But with the stock's valuation at more than 80 times sales, I'm also not betting with Musk yet, either. I'll wait for the Aug. 4 numbers.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.