Tech stocks short interest: Bears post bumper earnings from TSLA and FAANG slump
Short sellers saw a bumper year in 2022 as falling equity market valuations helped the bears pocket a whopping $300.1bn from short sales in US equities.
Tech stocks were the primary short-selling target as data showed that $9 out of every $10 shorted in tech resulted in a profitable trade in 2022. But will short interest in tech stocks cool down in 2023?
What is short selling?
Short selling refers to a trading strategy that aims to profit from a fall in the price of an asset.
In short selling, traders sell securities that they do not own. Traders borrow the targeted securities from a brokerage, securities lender or institutional investors. The borrowed securities are sold in anticipation of a price drop.
The short seller aims to buy back the securities at a lower price from the open market in order to return the securities to the lender. The short seller will pocket the price difference as profit.
Short selling does not always go according to plan and traders risk heavy losses if the price of the shorted securities rises.
According to the US Securities and Exchanges Commission (SEC), short selling benefits the market by providing market liquidity and price efficiencies. Investors also use short selling for hedging.
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Tech stocks short interest surged in 2022
2022 was the year of the short seller. According to financial data analytics company S3 Partners, US equity short sellers booked their highest profits in the last five years in 2022 following a slump in equity market valuations.
US equity shorts closed 2022 over 30% higher with total mark-to-market profits of more than $300bn. In comparison, the US benchmark S&P 500 (US500) index and tech-heavy US Tech 100 (US Tech 100) lost about 19% and 33%, respectively, during the period.
US Tech 100 Index (US Tech 100) live price chart
Short sellers showed a preference towards technology stocks with all five FAANG stocks – Meta Platforms (META), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) – among the most profitable short trades in 2022, S3 data showed.
Tech stocks which are considered as growth stocks bore the brunt of the 2022 market sell-off as investors reassessed the high company valuations amid rising interest rates, high inflation and global recession concerns.
Which tech stocks had the highest short interest? That answer to this question is Tesla, which saw an average short interest of over $18.90bn in 2022. The electric vehicle maker’s 67% slump in 2022 made short sellers mark-to-market profits of about $15.85bn, making it the most profitable short trade in 2022, according to S3 Partners.
Tesla (TSLA) stock live price chart
Tesla’s high price volatility made the stock a frequent target for short sellers. S3 Partners said in a separate note that Tesla’s high volatility was due to its low number of passive institutional long shareholders. The firm said:
Short interest in the stock also increased as Tesla founder Elon Musk sold about $20bn in TSLA stock to fund his acquisition of Twitter.
Other notable tech stock shorts in 2022 were fintechs Block (SQ), Paypal (PYPL) and Affirm (AFRM), on which short sellers made over 100% each in annual profits. Short interest in stocks like Microsoft (MSFT), Nvidia (NVIDIA), Advanced Micro Devices (AMD), Shopify (SHOP), Intel (INTC) and Salesforce (CRM) also saw short sellers make positive returns from their bearish bets in 2022.
“Shorting the Information Technology sector was like fishing in a barrel with $9 out of every $10 shorted being a profitable trade and 70% of all securities in the sector having down years,” said S3 Partners.
Is a tech stocks short squeeze likely?
The likelihood of tech stock short squeezes cannot be ruled out. An overcrowded short position in a security is vulnerable to a spike in asset price which can lead to short sellers scrambling for the exit to cut their losses.
An eventful year for Twitter that saw the social media platform go private caught short sellers off-guard several times. According to S3 data, Twitter short sellers posted a loss of over 37% ($501.5m) in 2022.
The latest short interest data showed the total number of shares sold short fell among top tech stocks like Apple, Meta Alphabet and Tesla.
MarketBeat data from 15 December 2022 showed total shares sold short in Apple, Meta, Alphabet and Tesla fell between 0.4% and 5.9% from a fortnight ago. Meanwhile, Amazon and Netflix were among FAANG stocks that saw higher short interest stocks in mid-December 2022 as total shares sold short increased about 10% each from a fortnight ago.
S3 Partners reported on 11 January 2023 that Invesco QQQ Trust ETF (QQQ) - the biggest exchange traded fund (ETF) tracking the US Tech 100 index - saw the largest increase in short covering among US ETFs in the last 30 days.
Invesco QQQ Trust ETF live price
Despite a fall in short interest for tech stocks, the tech-focused Invesco QQQ Trust ETF was the second most shorted ETF in the US, as of 6 January 2023, with only the SPDR S&P 500 ETF (SPY) above it. S3 Partners noted:
Outlook for the tech sector
JP Morgan gave the technology and communications sector a ‘neutral’ rating in its 2023 global equity outlook report as the investment firm expected headwinds such as rising interest rates and elevated US dollar dominance to be “less pronounced” in 2023. The US bank said:
Elsewhere, analysts at Jefferies were pessimistic about the tech sector outlook. Jefferies rated all three information technology (IT) sub-sectors – software, hardware and semiconductors – as ‘moderately bearish’.
“Although sentiment is starting to improve, the macro setting may only allow for a ‘bear market’ rally at best. Despite the haemorrhaging in earnings, the IT sector doesn’t look cheap,” said Jefferies in a November 2022 note.
Meanwhile, Morningstar said in its 2023 U.S. Equity Outlook report :
Final thoughts
Note that analysts’ forecasts can be wrong. When researching tech stocks’ short interest, we encourage you to conduct your due diligence by reading the latest news, conducting technical and fundamental analyses, and studying a wide range of economic commentary.
Remember, short-selling is a highly risky activity and your decision to trade should depend on your attitude to risk, your expertise in the market, the spread of your portfolio, and how comfortable you feel about losing money. You should never trade more than you can afford to lose.
FAQs
Is short selling profitable?
According to S3 Partners, US equity shorts closed 2022 over 30% higher with total mark-to-market profits of more than $300bn.
Why is there high tech-stocks short interest?
Tech stocks which are considered to be growth stocks bore the brunt of the 2022 market sell-off as investors reassessed the high company valuations amid rising interest rates, high inflation and global recession concerns.
Which was the most shorted stock?
S3 said Tesla was the most profitable and largest average US short in 2022.
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