Markets

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

When it comes to calling the FANG stocks a bubble, few are willing to put their money where their mouth is.

A number of people have pointed out that shares of some of the most dominant technology companies, including Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., have perhaps risen more than the fundamentals deserve. Early this summer, Goldman Sachs Group Inc. strategists predicted an "air pocket" was coming in the FANG bubble. After a survey of investors, Bank of America strategists called FANG and other technology stocks the most crowded trade in the market. Oaktree Capital co-founder Howard Marks recently compared the FANG to the Nifty Fifty and dot-com stocks of the 1970s and 1990s, respectively, as well as other bubbles.

Going Long
The short interest on Facebook, Apple, Amazon, Netflix and Google parent Alphabet recent sunk to a new low
Source: Bloomberg
Short interest is the ratio of shares that have been sold short as a percentage of equity float

Nonetheless, despite the growing skepticism, the number of investors actually betting that the FANG stocks will tumble is far below the rest of the market and falling. Collectively, the short bets against FANG stocks accounted for just 2 percent of their traded shares. Exclude Netflix, and the average short interest for the group drops to just 1 percent. That compares with an average of 4 percent for the S&P 500. Under Armour Inc., which is the most heavily shorted stock in the S&P 500, perhaps for good reason, has a short interest of 30 percent. What's more, just a few years ago, bets against FANG stocks were prevalent. In the autumn of 2012, more than 9 percent of the available shares of the FANG stocks were sold short.

Of course, not betting against the tech giants has been the right call, and it was validated again on Wednesday. Apple's shares shot up an additional 5 percent after reporting better-than-expected earnings. That caps a 35 percent run for the iPhone maker this year. Meanwhile, the percent of the company's available shares that have been sold short has dropped to 0.8 percent from about double that 18 months ago.

Few Betting Against FANG
Netflix is the only FANG stock with a short interest that is higher than that of the S&P 500
Source: Bloomberg
Short interest is the volume of shares sold short as a percent of equity float.

The gradual disappearance of FANG stock skeptics is good in the short term. Tech bears shedding their fur has pushed the stocks higher. Warren Buffett, for instance, who has long avoided tech stocks, made a big bet on Apple last year; Berkshire Hathaway's stake has risen to more than $21 billion. What's more, there is no real correlation between short interest and stock direction. Stocks with high short interest go up as much as those with low.

But over the long term, a lack of skeptics could be bad. The dearth of short interest suggests an enthusiasm for the shares that could be quickly popped if things turn south. And the falling short interest is odd given that the FANG stocks have risen an average of 37 percent this year, potentially setting them up for a fall, or at least a slip. Amazon, after all, trades at nearly 93 times its expected earnings for this year. Netflix's unending cash bonfire has burned through $2.1 billion in free cash flow in the past 12 months. The expectations for sales of Apple's coming iPhone are stratospheric even though the price of one model may top $1,000. Any of these situations would seemingly make for a good short bet, if anyone was willing to make it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net