Facebook Short Interest Collapses

Investing

Published: May 28, 2015 6:49 am

Shares sold short in Facebook Inc. (NASDAQ: FB) dropped 17% in the two-week period that ended on May 15. The decrease was among the largest of any Nasdaq-traded company. Some large pool of investors have changed their minds about the social network’s near-term prospects.

The short interest in Facebook dropped by 5.5 million shares to 21.6 million. The fall-off comes at a time when Facebook’s shares are near an all-time high. They trade at $80, up 26% over the past year, which has well outpaced the S&P 500. Just as extraordinary as the stock’s performance is Facebook’s market cap of $225 billion. The number is comparable to that of much larger companies based on revenue, in particular Wal-Mart Stores Inc. (NYSE: WMT) and Procter & Gamble Co. (NYSE: PG).

Investors who are “long” Facebook shares have to believe that the company will continue to post sales improvement rates like those registered in the most recent quarter. Revenue rose 47% to $3.54 billion. The increase was based on several critical factors, which Facebook enumerated when it disclosed its results for the first quarter of the year:

Daily active users (DAUs) were 936 million on average for March 2015, an increase of 17% year-over-year.

Mobile DAUs were 798 million on average for March 2015, an increase of 31% year-over-year.

Monthly active users (MAUs) were 1.44 billion as of March 31, 2015, an increase of 13% year-over-year.

Mobile MAUs were 1.25 billion as of March 31, 2015, an increase of 24% year-over-year.

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Investors who expect revenue and the share price to improve also expect that the social network’s user base will rise, that the amount of time members spend on the site will increase and that Facebook can do a better job selling advertising. Facebook’s share of digital ad revenue worldwide was 7.8% in 2014, according to eMarketer. That was second to Google Inc. (NASDAQ: GOOGL), which has a share of 31.4%, but well ahead of the major portals. Facebook has to take more business from Google to maintain its revenue growth. The trends of the past three years show that has already begun to happen.

The case in favor of an increase in Facebook’s shares is simple. Its revenue has to continue to rise by about 50%.

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