QuantumScape drops 15% after short-seller report calls it a ‘pump-and-dump SPAC scam by Silicon Valley celebrities’ and compares it to disgraced startup Theranos

NYSE trader
  • QuantumScape fell as much as 15% on Thursday after short-seller Scorpion Capital compared the company to Theranos and called it a “pump and dump SPAC scam by silicon valley celebrities.”
  • The report is based on interviews with former QuantumScape employees and alleges that many of the battery startups claims are false.
  • “Our research indicates that QuantumScape can’t even reliably make test cells that work,” the short report said.
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QuantumScape fell as much as 15% on Thursday after the battery startup was the subject of a scathing short-report from Scorpion Capital.

The report, titled “A pump and dump SPAC scam by silicon valley celebrities, that makes Theranos look like amateurs,” say that QuantumScape’s technical claims on its highly guarded battery technology are misleading, exaggerated, or fraudulent.

The report is based off of interviews with former QuantumScape employees, as well as battery experts and current Volkswagen employees that are focused on the auto company’s electric vehicle battery efforts.

QuantumScape is working to make a scalable solid-state battery that would promise quicker charging times, longer range, and lower costs for electric vehicles, relative to today’s lithium-ion batteries.

The company has partnered with Volkswagen, which has invested $300 million in QuantumScape over the past few years, but Scorpion Capital is skeptical that the battery startup can deliver on its promises.

“Our research indicates that QuantumScape can’t even reliably make test cells that work,” the report said, adding that “red flags around scaling and manufacturability render QuantumScape’s cells a pipe dream.”

Volkswagen and QuantumScape are targeting a production start of 2025 for the solid-state batteries. But Scorpion Capital doesn’t think that goal will be met. The short-seller believes Volkswagen is an unwitting partner that lends credibility to QuantumScape, similar to how General Motors partnered with Nikola, or Walgreens and Safeway partnered with Theranos.

“A key feature of the largest frauds is often the backing of a famous investor or corporate partner, in this case VW – ‘the smart money’ – that lends credibility to the scam,” Scorpion Capital said.

Scorpion Capital is short shares of QuantumScape, meaning it stands to profit if the stock moves lower.

Read more: BTIG identifies 14 beaten-down stocks poised to dominate the market this earnings season and extend their track record of crushing expectations

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Short-sellers have tripled bets against SPACs since the start of 2021 amid fears the blank-check frenzy has gone too far

Stock Market Bubble
  • More and more short-sellers are beginning to turn their attention to SPACs, which have experienced a boom in 2021.
  • They’ve more than tripled their bets against SPACs to $2.7 billion since the beginning of the year, according to data from S3 Partners.
  • Recent SPACs that have been targets of high profile short-sellers include XL Fleet and Lordstown Motors, among others.
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SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.

The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.

Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.

Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.

Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.

Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.

Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.

The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.

Read more: ‘It’s been a motherf—ing rocket ride’ : A top NFT artist who’s sold over $60 million worth of crypto art breaks down how he’s capitalizing on the sudden boom – and shares how he positions his own portfolio

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How to navigate GameStop madness – The strategy that outsmarted Wall Street – How Reddit traders are driving a populist movement

Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through what’s been happening in markets, as well as what to expect in the coming weeks. This week is packed with all the GameStop and Reddit content you could ever ask for.

Here’s what’s on the docket:

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Have thoughts on the newsletter? Just want to talk markets? Feel free to drop me a line at jciolli@insider.com or on Twitter @JoeCiolli.


Your weekly recap and outlook

If you’re reading this, that means you managed to make it through the stock market’s most absurb week in recent memory. You’ll always remember where you were when Reddit day traders banded together and pumped 90’s nostalgia stocks like GameStop to the moon – an unprecedented uprising that sent ripples through every layer of the financial system.

The story starts, of course, with the traders themselves, who conduct their business on r/WallStreetBets subreddit. They threw the exact perfect mix of market savvy, anti-establishment sentiment, and sheer will into a blender and came out with a destabilizing cocktail that left established Wall Streeters scrambling clean up the mess.

The central concept was relatively simple: focus on buying heavily shorted stocks, which will hopefully squeeze those positions until they’re forced to close, pushing the stock up even further. Ideally that inspires people that feel left out to pile in. Rinse, repeat. That these companies – which included Nokia, BlackBerry, and BB Liquidating (formerly known as Blockbuster) – were nostalgic, past-their-prime businesses was an added bonus to the Reddit crowd, who are never ones to pass up a chance at irony.

But the phenomenon goes far deeper than that. Underlying the memes and the hubris rests an anti-establishment streak. For a portion of the WallStreetBets crowd, this undertaking isn’t just about making money. It’s about making Old Wall Street pay, and the group isn’t exactly being coy about that fact. “It seems Occupy Wall Street had the wrong approach,” the official WallStreetBets Twitter account posted on January 26.

So what’s the damage look like on Wall Street so far? Arguably the biggest casualty has been Melvin Capital, which held a short position on GameStop that’s left them down 53% year-to-date – performance so bad that investing titans Steve Cohen and Ken Griffin have had to bail them out

But it hasn’t been all negative. Silver Lake Partners saw a convertible-debt investment strike gold when AMC Entertainment’s stock surged this past week. The firm was able to flip that debt into stock, which it then sold at the peak for a smooth $113 million profit. Some have called it the “trade of a lifetime.”

Then there’s also the matter of the preferred trading platform for the Reddit army: Robinhood. The online brokerage had a week for the ages after restricting further buying of GameStop, then backtracking after backlash from everyone from AOC to Chamath Palihapitiya. There have also been reports that Robinhood was forced to draw on bank credit lines amid the madness. How this impacts the company’s quest to go public this year will be a story to watch in the coming weeks.

So where do we go from here? One thing to watch is how hedge funds react. They were already shedding equity exposure in the early days of the GameStop craze, and it’s possible the market dislocations exploited by Redditors will cause them to retreat further.

Many other questions remain. Who else was caught short and ultimately doomed by WallStreetBets? Who else raked in big returns like Silver Lake? When will the so-called meme stocks come plunging back down to earth? And will the stock market ever be the same? Keep watching this space to find out the answer to those, plus many more.


JOIN OUR LIVE EVENT: A conversation with Insider’s markets gurus on the GameStop and Reddit-trader phenomenon

Join us Tuesday, February 2, 2021 at 1:00 p.m ET as deputy editor Joe Ciolli, markets and economy reporter Ben Winck, and senior investing reporter Vicky Huang discuss the GameStop phenomenon, the influence of WallStreetBets, and how the Reddit-fueled trade might end.

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How to navigate a GameStop crazed environment

GameStop Clerk

Ally Chief Investment Strategist Lindsey Bell says the meme-stock rally could be a good thing for average investors. Still, she says traders who want to play the newest hot stocks should understand they are speculating. Bell also advises investors to have a plan and stick to it when things get strange, and understand how unusual this time is.

Read the full story here:

A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment


The intricate strategy GameStop traders used to outsmart Wall Street

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Steve Sosnick – the chief strategist of Interactive Brokers and head trader of its trading unit Timber Hill – breaks down the short squeeze and gamma squeeze Reddit traders put in place for GameStop. He also shares how the massive moves in these so-called meme stocks could permanently alter markets.

Read the full story here:

A veteran options trader breaks down the intricate strategy that Reddit traders used to outsmart Wall Street’s bet against GameStop – and shares 2 ways the parabolic rally could permanently alter the stock market


How Reddit-trader mania represents a full-fledged populist movement

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The Reddit-fueled trading phenomenon lifting GameStop, AMC, and other stocks is backed by populist sentiments. Cries to dethrone the establishment and redistribute wealth resemble those seen at Occupy Wall Street protests in 2011. The trend has all but certainly formed a bubble, but its political messaging can still live on.

Read the full story here:

The GameStop mania driven by Reddit traders isn’t simple market trolling. It’s a populist movement threatening to disrupt the financial system to a degree Occupy Wall Street only dreamed of.


JOIN OUR LIVE EVENT: Execs reveal what’s on tap for the red-hot IPO market in 2021

Join Insider on Wednesday, February 3 at 2:30 p.m. ET as Insider’s chief finance correspondent Dakin Campbell moderates a panel featuring Kim Posnett, Goldman Sachs partner and Internet investment banking chief, Greg Rodgers, a Latham & Watkins LLP attorney and direct-listings expert, and Mitchell Green, a venture capitalist at Lead Edge Capital who backed Uber, Spotify, Asana, and Alibaba.

These IPO experts will discuss what you can expect for the year ahead and how the recent changes have dramatically altered the calculus for startup entrepreneurs. They will also take reader questions. 

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Stock pick central

Seeking experts who are willing to name names? Look no further:

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Reddit day traders are taking on hedge fund giants and winning, and it’s a sign of a new era for markets

WallStreetBets
  • The 4 million-strong WallStreetBets forum on Reddit has officially disrupted Wall Street.
  • They did it by piling into heavily shorted stocks, sparking short-squeezes at the expense of Wall Street hedge funds and large institutional investors.
  • “They are proving to be quite capable of mounting some successful ‘value capture’ against Wall Street institutional investors,” Fundstrat’s Tom Lee said.
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Wall Street hedge funds are scrambling, and it’s all because of a online investing forum that has more than 4 million members who self-describe themselves as “degenerates.”

Reddit’s WallStreetBets forum has surged in popularity after retail investors within the group successfully staged a gravity-defying short-squeeze in GameStop at the expense of hedge funds that were betting the physical video-game retailer was on its last legs. 

A short-squeeze occurs when investors who are betting against the stock are forced to close out their position by buying the stock, further adding fuel to the fire.

As of Thursday morning, GameStop had a year-to-date gain of more than 2,400%. The rally in GameStop crushed Melvin Capital, a roughly $12 billion hedge fund that has suffered a more than 30% decline due to its short position in GameStop.

The hedge fund received an emergency $2.8 billion investment from Steve Cohen’s Point72 and Ken Griffin’s Citadel amid the record surge in GameStop.

Read more: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios

Citron’s Andrew Left, a famed short-seller, also felt the heat from Reddit investors after he called for the stock to fall 50% last week. Left ultimately closed out his short in GameStop for a loss, as did Melvin Capital.

Maplelane Capital is another New York-based hedge fund that saw declines of about 30% due to its short position in GameStop, according to a report from The Wall Street Journal.

The developments are remarkable when you consider that retail investors on Reddit likely lack the sophisticated data feeds that multi-billion-dollar hedge funds rely on.

But after spending a few hours on the forum, billionaire investor Chamath Palihapitiya concluded that the Reddit traders can do the same fundamental analysis as hedge funds, if not better. Palihapitiya ultimately followed the retail investors into GameStop, and won big.

Now, Reddit traders are trying to replicate the success of GameStop and are targeting other stocks that are highly shorted by professional investors. And they’re succeeding.

Stocks like AMC Entertainment, Bed Bath & Beyond, and Virgin Galactic have soared this week as Reddit investors piled into the names via both stocks and deep out of the money call options, creating unprecedented demand for the shares.

Read more: A chief investment strategist breaks down how the GameStop saga could upend decades-long practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment

“They [retail investors] are proving to be quite capable of mounting some successful ‘value capture’ against Wall Street institutional investors,” Fundstrat’s Tom Lee said in a note on Monday, adding that “large size does not always win.”

But the influence of WallStreetBets on stock moves could wane in the future as systematic funds “adjust” their models to incorporate this new source of volatility, Lee said.

And it’s not only quant funds that could put a dent in the influence of 4 million Reddit traders, it’s also trading platforms.

On Thursday, Robinhood restricted buy trades in a handful of stocks that have seen epic short squeezes and have been targeted by the Reddit group, including GameStop, AMC Entertainment, and Nokia, among others.

Now the question is, according to Lee: “Will their strategies endure?” 

Read more: Morgan Stanley handpicks 18 US stocks to buy for the best business models that deliver market-beating returns for years to come

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Tesla short-sellers lost $38 billion throughout the automaker’s colossal 2020 rally

Elon Musk
Elon Musk.

  • Tesla short-sellers saw $38 billion in mark-to-market losses throughout 2020, Bloomberg reported Thursday, citing S3 Partners data.
  • Short interest in the company’s shares plunged to less than 6% of Tesla’s float from nearly 20% at the start of last year.
  • The losses trounce the $2.9 billion total seen in 2019 and come on the back of Tesla’s 740% surge over the past 12 months.
  • Watch Tesla trade live here.
  • Visit Business Insider’s homepage for more stories.

Investors betting against Tesla lost billions last year, as the automaker’s shares leaped above nearly all estimates.

Short sellers saw $38 billion in mark-to-market losses throughout 2020, Bloomberg reported Thursday, citing data from S3 Partners. Short interest in the shares fell to less than 6% of Tesla’s float from nearly 20% as the company’s rally led investors to close out their bearish positions.

Tesla bears lost more than any other group of short-sellers in 2020. Those betting against Apple saw the second-largest deficit of nearly $7 billion, according to Bloomberg.

Read more: Wall Street’s biggest firms are warning that these 7 things could crash the stock market’s party in 2021

The hefty losses are up sharply from the previous year’s total. Bearish investors lost $2.9 billion in 2019 as Tesla jumped nearly 70% from its June low into the end of December.

Short-selling a stock involves selling borrowed shares and buying them at a lower price. Investors shorting a stock profit from a drop in price.

Tesla shares gained 743% in 2020, boosted by steady profitability, newly bullish analyst outlooks, and outsized demand from retail investors. The rally pushed CEO Elon Musk’s net worth to $158 billion in December and established him as the world’s second-wealthiest person – after Amazon CEO Jeff Bezos.

The automaker split its shares on a five-for-one basis in August after Tesla’s stock price climbed above $2,000. While the action had no effect on the company’s fundamentals, some analysts saw the move as helpful to stoking new interest from retail investors.

The stock most recently charged higher upon inclusion in the S&P 500 index. News of Tesla on the S&P lifted shares in mid-November. Soon afterward, Goldman Sachs analysts noted that institutional investors tracking the index could fuel Tesla’s next leg higher as they look to match the benchmark’s weight.

Musk has repeatedly squared off with short sellers on social media. The chief executive’s latest mockery of the group came in July when he sold red shorts featuring the company’s logo. The “short shorts” – marketed as a sardonic rebuke to the company’s short-sellers – proved so popular on their launch day that Tesla’s merchandise website crashed.

Tesla closed at $705.67 per share on Thursday. The company has 20 “buy” ratings, 44 “hold” ratings, and 19 “sell” ratings from analysts.

Now read more markets coverage from Markets Insider and Business Insider:

US stocks close at record highs to end tumultuous 2020

A bitcoin ETF could finally become a reality in 2021 after an SEC filing from VanEck

The founder of the world’s first vegan ETF explains how her market-beating fund is naturally built to include the pandemic’s biggest winners – and why industry titans like Facebook and Uber fit the bill

TSLA

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