Twitter Short Sellers Salivate as Shares Slump

Twitter Inc.'s(TWTR) post-IPO gains have coincided with a growing number of investors betting against the rally.

Shares of the microblogging site have more than doubled from the $26 IPO price two months ago. The rally picked up steam at the end of December, fueled by both individual and institutional investors alike.

Some observers have speculated that part of the rally had been due to a short squeeze, which occurs when investors who bet against the stock then switch their positions en masse and fuel the price higher. But a look at the data, courtesy of securities-financing tracker Markit, suggests otherwise.

The percentage of Twitter shares on loan—a proxy for short-selling activity—jumped to as high as 5.1% of shares outstanding on Jan. 2, and was recently at 4.7%, according to Markit. That’s up from 1.5%, when shorting Twitter was first available in mid-November.

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Short sellers borrow shares to sell them in hopes of buying them back cheaper at a later date, aiming to profit from a price decline. In Twitter's short history as a public company, short sellers have generally become more convinced that the stock is set to fall. A decline in short interest could cause a short squeeze, but that hasn’t happened up to this point.

“It’s not a short squeeze driving the share price higher,” Alex Brog, a director at Markit, told MoneyBeat. “The stock is getting expensive to borrow and it doesn’t look like the shorts are rushing to cover their positions.”

Twitter's short interest is more than the average across the S&P 500 of about 3.4%.

Shares fell 7.3% to $61.46 on Tuesday despite the broad-market rally. The stock peaked on Dec. 26 at $74.73 and has traded in choppy fashion ever since.

On Monday, Morgan Stanley(MS) downgraded its investment rating on the stock to underweight from equal-weight. The firm, which maintained its $33 price target, cited concerns about Twitter's ability to grow in the crowded online advertising market.

Morgan Stanley became the latest Wall Street firm to cast a downbeat tone toward Twitter. Twenty of the 26 analysts that cover Twitter have the equivalent of "hold" or "sell" ratings on the stock, according to Thomson Reuters.