Tesla's recent stock price plunge is likely due to short sellers increasing their bets against the company, Bank of America told clients Wednesday.

That's also priming shares for a sharp move upward in a "short squeeze," the bank predicted.

A so-called battleground stock, Tesla has split Wall Street between those who believe in CEO Elon Musk's electric car manufacturer and those who think its financial issues may be too large to overcome without major business changes. More than 31% of Tesla floating shares were sold short by May 21, according to FactSet data.

"Although far from taking a constructive view on TSLA (see below for more detail), it appears much of the pressure on the stock over the past few days/weeks has been driven by shorts pressing aggressively," analyst John Murphy wrote.

"In our view, this could set up for a short squeeze in the coming days/weeks/months should deliveries, profits/losses, cash flow/burn come in even slightly better than draconian expectations, or should Musk introduce another business venture and/or longer-term financial target that once again gets bulls excited," he added.

Tesla stock is down nearly 40% in the last six months and down 26% since April 1.

Despite the short squeeze warning, Murphy is not positive on Tesla's business and has an underperform rating on the stock.

Some high-profile short sellers such as David Einhorn and Jim Chanos have clashed with Tesla and its CeO Musk in the last few years.

Most recently, Einhorn said Tesla CEO Elon Musk's promises about Tesla's self-driving vehicles were "a lot of horse---t." Last year, Einhorn and Musk clashed over Greenlight's short position.