To The Moon

Meta Short Sellers Reap Gains as Stock Sheds 7.8% Amid AI Cash Burn

$Meta Platforms, Inc.(META)$   short sellers stepped up their bet hours before earnings late Wednesday, watched the shares jump on a better-than-expected outlook, then saw them tumble Thursday morning as investors counted the cost of that outlook instead. 

Shares fell 7.8% to $643.34 Thursday morning as Wall Street digested the company's first negative free cash flow since 2012 as a result of increasing spending in the AI buildout that's fueling the better-than-expected outlook. 

Amid the decline, the bearish bets placed Wednesday are now in profit, and the holders who had spent the session taking money out looked right to have done so. Exchange data tracked by moomoo showed 2.11 million shares were sold short on Wednesday. Short selling is borrowing shares, selling them and hoping to buy them back cheaper later.

The spending bill remains the strong bear point, as capital expenditures — money spent on buildings and equipment, in Meta's case mainly artificial intelligence data centers and chips — reached $34.91 billion in the quarter alone. That pushed free cash flow, the cash left after those purchases and finance-lease payments, to negative $2.12 billion despite $32.79 billion of cash generated from operations. The company also raised the low end of its full-year capital expenditure outlook to $135 billion to $145 billion from $130 billion to $145 billion. 

Still, the short volume was just 7.23% of the 29.20 million shares traded Wednesday, below the 8.42% daily average, signaling that it was driven by positioning ahead of the financial results, not a pile-in.

If the losses hold throughout the trading day, Meta's 5.5% slide would be the worst performance among the Magnificent Seven stocks Thursday, outpacing $Amazon (AMZN.US)$'s 2.8% slide, $NVIDIA (NVDA.US)$'s 1.9% dip, $Alphabet-A (GOOGL.US)$'s 1.4% and $Microsoft (MSFT.US)$'s 0.6%, while $Apple (AAPL.US)$ and$Tesla (TSLA.US)$ were little changed, giving back their earlier gains. The wider $S&P 500 Index (.SPX.US)$ is down 0.8%, while the tech-heavy $Nasdaq Composite Index (.IXIC.US)$ fell 1.4%. 

For the fourth quarter, the company forecast revenue of between $73 billion to $76 billion against the $73.57 billion analysts expected, with the midpoint of the range comfortably above expectations despite an expected currency headwind of about 1%. 

The outlook rests on a third quarter that beat on the top line, as revenue rose 26% from a year earlier to $64.60 billion, ahead of the $63.33 billion expected. Advertising revenue also grew 26%, to $63.06 billion against $61.85 billion expected, showing the core business that funds everything else at Meta is still growing faster than analysts had penciled in.

Profit told a different story on paper, with operating income falling 37% to $12.99 billion, well below the $20.85 billion expected, and operating margin — profit as a share of sales — halving to 20% from 40% a year earlier. The cause was a $9.89 billion charge for an agreement with 52 state attorneys general to resolve litigation over teen mental health and social media, an agreement that provides for payments of up to about $18.59 billion. 

Long holders were heading the other way even before the financial results were released, pulling a net $128.36 million out of the stock on Wednesday, with selling coming in at every order size. Small orders, the ones usually linked to retail investors, led at $50.75 million net out, followed by large orders at $46.87 million net out — a broad de-risking into the results.

The exit continued Thursday morning, with big block sell orders outpacing buy orders by $43.23 million in the first 33 minutes of trading. 

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