Facebook Inc Stock Is Seeing A Massive Short Unwinding

  • Short interest in Facebook dropped by almost 12% in the last cycle.
  • Market participants appear to be growing bullish on the stock.
  • This, coupled with its positive catalysts, could further push the Facebook stock higher.

Shareholders of Facebook Inc (NSDQ:FB) have been on a roll lately. The Facebook stock price has gained almost 38% in value since the lows it created back in February. After such a solid upsurge, with its shares hovering near its 52-week highs, there is reason to believe that the rally in its shares might still continue as short interest declined by a significant 12% over the last cycle alone. Let’s dig deeper and see what’s happening here.

What's short interest and how does it matter?

Its worth noting that short interest is the total number of outstanding shorted contracts at a given date. If market participants are shorting a particular stock hoping that its value will plummet in the near future for any possible reason, then the company’s short interest would see an uptick over the subsequent reporting cycles. Similarly, if market participants are unwinding their short positions, maybe because they no longer expect a further downside in the stock’s value, short interest in the company would decline.

Thus short interest becomes a telling indicator of market sentiment as it basically gauges how market participants are reacting to a company’s stock. A large increase or decrease in short interest generally indicates that the market is growing bullish or bearish about the company. So it’s often rewarding to analyze the short interest of companies before initiating any position in them.

facebook chart7

(Source: MarketXLS.com)

Now let’s come back to the Facebook scene. Short interest in the company dropped by about 12% during FINRA’s last reporting cycle alone; I've attached a chart above for reference. If we talk about the last 2 months for instance, then short interest in Facebook has dropped by about 16%. That’s a significant drop and it's definitely one of the largest plunges in short interest amongst large-cap stocks during the time frame. Its also worth noting that short interest in the company is hovering near its 52-week lows.

Another key factor at play here is trading volume; Facebook’s trading volume has gradually increased over the last few reporting cycles as is evident in the chart above. So while the social networking giant’s stock was on the rise, and traders were closing their short positions, there was an increased participation from investors. This is a particularly encouraging sign for long-side market participants.

And lastly, its worth noting that Facebook reported earnings on July 27. But the short interest figures mentioned above were published last week, with a cutoff date of July 29. This essentially means that the above data consists the market activity post Facebook's earnings release. With that in mind, I think we can come to the following conclusions:

  • The 12% drop in Facebook’s SI means market participants liked its earnings results.
  • Traders no longer project a significant drop in its stock price.
  • Stock price has almost stayed the same after earnings, but SI has dropped significantly.
  • Reduced selling pressure could entail more upside in the Facebook stock price.
  • Continued short unwinding could trigger a rally in itself.

All this is positive for investors.

What lies ahead for shareholders?

A few days after the short interest data was published, Facebook launched “Stories” for its Instagram app. So I believe that the positive impact of this development would reflect in the next cycle of Facebook’s short interest cycle. Stories has been reported to enable Snapchat-like features and functionality within Instagram to promote user engagement. This might have allowed the social networking giant to bypass a potentially expensive acquisition of Snapchat. This is a huge positive for the company.

Secondly, Facebook is also planning to add ecommerce features to its “Messenger” app by the end of this year. The move would allow Facebook to compete with the likes of Amazon and EBay, without requiring it to engage in the expensive and time-consuming task of building an audience from scratch. I believe that further monetizing of its existing user base is an excellent way forward for Facebook and as we head closer to its release, market participants would feel the same and unwind their short positions accordingly.

facebook chart

(Source: MarketXLS.com)

And lastly, Facebook is expected to grow at a blistering pace over the next 2 years. Fellow contributor Lior Ronen has already discussed Facebook’s financials post Q2 earnings in his recent article so I won’t go over that part again. But I’d like to add that the analyst community is bullish on the stock; its revenue and EBITDA figures are projected to surge by 72.6% and 74.3% over the next 2 years alone. That’s an excellent growth trajectory and not many would short such a stock unless something changes.

Putting it all together

Shares of Facebook may have surged to 52-week highs but that may not be the end of its rally. There are few major positives, including the introduction of Instagram Stories, blockbuster projected financial growth and the introduction of e-commerce features to its Messenger, that could drive the stock further up, going forward. This, coupled with a significant drop in the company’s short interest, makes Facebook a compelling buy. I expect its short interest to drop further in FINRA’s next few reporting cycles.

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