Even though Facebook (NASDAQ:FB) shares are off 22% from their open last Friday, it looks like short sellers still see more potential on the downside.
Short selling involves the process of borrowing shares and selling them immediately — with the hope of buying them back at a lower price in the future to make a profit.
According to Data Explorers, about 8% of Facebook’s float is in short positions, but it still is early, and it looks like the amount will expand during the next few weeks.
Something else: Bloomberg is reporting that various large investors are making short bets on European markets. This is through highly sophisticated instruments known as put warrants. Based on current activity, traders are looking for Facebook to drop to the low $20s by the end of the year.
Keep in mind that it looks like the recent plunge in Facebook’s stock was a combination of three key factors: lowered expectations for revenues and earnings, an oversupply of shares and a pricing that was too high.
But things might be exacerbated within three months when Facebook’s lock-up period expires, which will allow insiders to unload their shares. Then there will be another group that can sell — that is, those investors who bought shares in the secondary markets. During the past few years, these markets have seen billions of dollars in trades, and the prospect of these traders also dumping shares could weigh on the stock.
It’s hard to tell, but the prospect of more shares flooding the market is not good, and it certainly doesn’t help that Facebook appears to be experiencing a slowdown in its advertising business.
All in all, it looks like a terrible combination that could put even more pressure on the stock — and make the shorts turn a smile.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.