SpaceX shorts are betting $25 billion against Elon Musk. Is it time to cover?

About 206 million SpaceX shares have been sold short, as per S3 Partners data. In fact, the number of bearish bets rose very fast —from about 185 million shares last week to around 40 million shares just a month ago.

And currently, short positions account for about 32% of the company's publicly traded shares, valued at roughly $25 billion.

However, the shares bounced back on Tuesday, climbing as much as 7% after Macquarie reaffirmed its "outperform" rating, saying the recent selloff had created an attractive buying opportunity. So are short sellers trapped now, or should they keep their short positions?

The short position on SpaceX suddenly grew. In fact, many sellers increased their positions speculating on two major events:

The company generated about $19 billion of revenue over the year, up 33% year over year. That's impressive growth, but it's attached to a market capitalisation of about $1.6 trillion. As per a Motley Fool article, the stock trades at more than 80 times sales, and the business is still losing billions of dollars a year.

The question isn't whether SpaceX is a great company—it's whether its $1.6 trillion valuation already reflects too much future growth, the article points out.

A short squeeze needs more than a big short position. It happens when short sellers are forced to buy back shares quickly because:

If only a limited number of shares are available to buy, that rush can send the stock price soaring.

Some of those factors are present in the case of SpaceX. A third of the tradable float sold short is an extremely crowded bet. Now, if the company delivers stronger-than-expected earnings on Aug. 4, many short sellers could rush to cover their positions, pushing the stock even higher.

One thing, however, can work in favour of the short sellers. Currently, only about 640 million SpaceX shares—roughly 5% of its more than 13 billion outstanding shares—are available for public trading. But once the lock-in period expires, more shares will enter the market, giving the short sellers the opportunity to buy the stocks back when they want to close their positions.

That immediately reduces the chances of a major short squeeze.

So, while Elon Musk argues that the survival probability of firms that maintain a significant short position in SpaceX over time is very low. The situation isn't as one-sided as that headline number suggests.

But a squeeze is a trade, and does not count as an investment. The early stock movements can't really provide the best outlook for the fundamentals of the company

Wall Street remains largely upbeat on the stock. More than 80% of analysts tracked by Bloomberg rate the company a buy equivalent, and their average price target of about $238 implies roughly 78% upside from current levels.

Viram Shah, Founder & CEO, Vested Finance, earlier told LiveMint, “On a name like SpaceX, you'll see serious analysts land a long way apart on fair value, which is really just an honest way of saying nobody's sure.”