Meta's 9% Slump Brings Windfall for Short Sellers as AI Costs Soar

$Meta Platforms, Inc.(META)$   short sellers are reaping gains as the social media giant's stock tumbled about 9% in early trading Thursday, after spending on artificial intelligence (AI) infrastructure buildout crimped profit.

Trading in borrowed Meta shares that were sold short almost tripled to 1.26 million shares Wednesday, before the parent company of Facebook, Instagram and WhatsApp reported second quarter adjusted earnings that missed analysts’ estimates by almost 14%. The company also raised the lower end of its capital expenditures guidance, effectively increasing its midpoint to $137.5 billion, above the $135.86 billion that analysts were expecting. 

As a result of aggressive spending on AI infrastructure for the quarter, the company’s free cash flow shrank 91% to $784 million. This critical metric measures cash remaining after operating expenses and capital investments, and its sharp contraction highlights the heavy financial strain of funding next-generation computing power.

Weeks before the results, short sellers have already been building their wagers against the company whose stock has been languishing in a bear market, having fallen more than 25% from its peak in August. Short interest, or the tally of short positions that haven’t been closed has climbed to 37.9 million shares as of mid-July, the highest since November 2022, according to the latest exchange data available. 

Short volume represents intraday short-selling activity where traders sell borrowed shares in anticipation of a price decline. Short interest measures the total percentage of outstanding shares held by short sellers who profit when a stock drops.

While Meta’s total revenue climbed 28% in the second quarter, net income fell 14% to $15.85 billion due to soaring costs and expenses. Operating margins compressed from 43% to 31% over the same period last year, weighed down by $2.40 billion in legal proceedings charges and $1.18 billion in severance expenses. Total costs and expenses surged 55% year-over-year to $42.03 billion, fueled by heavy capital expenditures of $31.08 billion during the quarter.

Management raised its full-year capital expenditure guidance to a range of $130 billion to $145 billion. Total full-year expenses are now expected to land between $165 billion and $169 billion, signaling that management intends to double down on artificial intelligence investments despite an uncertain commercial payoff.

After the recent slump, less than 2% of the positions show above are profitable and the rest are underwater or sitting in unrealized losses, according to volume-by-price distribution map. With the stock trading near the $528 immediate technical support and resistance lingering around $614, the stock risks further downside momentum if broader market sentiment remains risk-off.

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