Shorting Mega-Cap Tech Stocks Finally Became Profitable This Year

Investors who had tried shorting mega-cap technology stocks during the pandemic were burned.  According to S3 Partners, short-sellers of the mega-cap tech stocks saw a $36 billion loss in the prior two years.  While the Fed was flooding the market with liquidity during the pandemic, shorting the FANG stocks was a losing proposition.

With this year’s rout in the Nasdaq 100 ($IUXX) (QQQ), however, short sellers were finally rewarded.  With this year’s plunge in the FANG stocks of Facebook-owner Meta Platforms (META), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Google-owner Alphabet (GOOGL), short sellers were awarded $19.8 billion in mark-to-market profits for investors betting on declines as of June 30. 

According to calculations from S3 Partners, those shorting the FANG stocks in 2020 lost nearly $20 billion and lost nearly $16 billion in 2021.  Fleckenstein Capital said, “the buy-the-dip mentality made it very difficult to short tech stocks in the past.”  Short-sellers borrow shares and sell them, hoping to repurchase them later at a lower price to profit from the difference.  However, the timing must be right since short-sellers lost money in 2020 and 2021 when the FANG stocks soared.

Fleckenstein Capital said it had stopped shorting meg-cap tech stocks in the past few years, even though many companies got “absurdly” priced because quantitative easing prevented deep selloffs.  After years of outsized gains on optimism about tech’s ability to continue its rapid growth, bets against the sector have remained fairly small.  Short interest as a percentage of total shares outstanding as of June 30 is less than 3% in all of the FANG stocks, according to S3 Partners data.

The earnings dominance of mega-cap tech stocks is set to retreat as only four mega-cap U.S. tech stocks -- Alphabet, Apple, Microsoft, and Meta Platforms -- are expected to be among the top-ten earners in the latest batch of earnings reports to be soon released.  That’s the lowest in two years, according to Bloomberg data.  Bright Trading said, “the easy money has already been made on the short side, and it will be tougher going forward,” with the Nasdaq 100 down -28% this year. 

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