- Citron Research's Andrew Left recently issued a short warning on Facebook stock.
- Activity in Facebook Put Options has accelerated following the Citron note.
- How valid is the short call and should investors sell Facebook stock?
Facebook, Inc. (NASDAQ:FB) stock has gained over 18% in the year-to-date, beating the Nasdaq Composite's (INDX:COMPX) meagre 3% rise in 2016. The rise over the last year has been even more spectacular, with the Facebook stock price rising over 40%, more than quadrupling the NASDAQ Composite gains of 9%. While the market has been celebrating Facebook's rising sales and earnings, with the stock price hovering near its 52-week high, Citron Research head Andrew Left seems to clearly disagree, citing a potential decline in engagement trends and competition from Snapchat as reasons to short Facebook, Inc. stock. How much water does the theory hold? Should investors sell Facebook stock?
Going Short On Facebook Stock
Andrew Left is shorting Facebook, citing competition from Snapchat and concerns on Facebook's ability to generate revenue through advertisements. Quoting from the Bloomberg source:
Left revealed to Bloomberg News last month that he was shorting shares of Facebook, citing increased competition from Snapchat Inc. and concerns over the company's ability to generate revenue through advertisements.
The short-seller, who shot to fame with the short call on Valeant Pharmaceuticals, hit out at Facebook claiming the stock will be a massive short once engagement numbers begin to decline. The famed short seller also claimed that the company could be valued at $200 - $250 billion in a year and a half.
"So by me saying that maybe in a year and a half from now Facebook is going to be a $200 billion dollar company or a $250 billion dollar company, it's not such a bad thing," he said.
To put Left's call in perspective, Facebook currently has a market capitalisation of $359.11 billion, implying a potential downside of 30% to 45% over the next year and a half. Well, that will be a fall which we will definitely hear, if it ever comes to be. While the Master short-seller got it right on Valeant, the Facebook call looks more like a folly rather than another successful short.
Facebook Stock Continues To See Massive Short Unwinding
Facebook put options activity has increased since Andrew's bearish comments, last month. As per Schaeffersresearch.com, Facebook put options are trading at 1.4X the regular estimates rate. It looks like traders have really caught on to Andrew's bearish comments. However, a closer look at the latest short interest data indicates that Facebook shorts are getting squeezed, and rapidly.
After a 12% fall in the short interest in the previous reporting cycle (July 29th), the short Interest in Facebook stock dropped another 8% in the August 15 reporting cycle. With the cumulative short interest at 19.5M, the short interest position is at a new 12 month low.
Facebook Engagement Is Far From A Decline
Let's now look at Andrew's claims with regard to Facebook's engagement metrics. Facebook reports its Daily Active Users (DAU) to Monthly Active Users (MAU) as a measure of engagement on the platform. Well, Facebook's reported DAU/MAU has steadily grown over the last few years. Facebook reported a DAU/MAU ratio of 66% in its latest quarterly report, which is up from the 60% mark 3 years ago. Given the fact that Facebook is also growing its MAU at a 15% clip, the DAU growth is pretty strong.
Well, we can look at engagement another way. The average time spent by Facebook users on Facebook, Messenger and Instagram is nearing the hour mark, as per Bureau of labour statistics. This makes Facebook the second most popular leisure activity, just behind television programs and movies. Well, It's hard to believe that engagement levels on Facebook are threatened or declining.
Is Snapchat A Major Threat To Facebook?
Addressing the second part of the short thesis, is SnapChat really a major threat to Facebook? Consider this, Facebook added 222M users over the last one year to its platform. In comparison, Snapchat's last reported user base was closer to the 200M mark. And, that's the user addition over the entire time Snapchat has been in existence.
Find more statistics at Statista
As per Bloomberg, Snapchat reported in June that daily active users on the platform have crossed the 150M mark, up from 110M in December 2015, implying a 40M net addition to the DAU over the first half of 2016. Facebook, in comparison, added 90M to its DAU over the same time. In short, Facebook is still growing its user base at a faster rate than Snapchat, in absolute terms, which dilutes the theory of Snapchat being a competitive threat to Facebook.
In conclusion, it's hard to see how the bears are right about Facebook. While Citron's Andrew Left might have nailed it with the Valeant Pharma call, shorting Facebook at the current time would be more a gamble rather than a calculated move. With the continuous improvement/growth in its engagement levels, it's purely speculative to expect engagement on the platform to go south, suddenly. Snapchat isn't the major threat its being made out to be, which dilutes the bearish theory driving the Facebook short call. The decline in Facebook's short interest shows that Facebook shorts are getting squeezed, which is no surprise given the momentum Facebook stock is currently enjoying. With the company blowing past analyst estimates, shorting Facebook is a highly risky and speculative gamble.