Negativity for companies in the Nasdaq index could lead to substantial gains for investors if the market falls. Short-selling, or betting that a company’s share price will decline, is a strategy that works if a company’s business model is broken. An excessively valued company, as quantified by such metrics as the price-to-earnings ratio, often attracts short-sellers, but this strategy often leads to losses because markets tend to be stay irrational longer than investors can stay solvent.
Some of the technology firms with increased short-selling by more than 10% are:
| Company | Short Interest Feb 28 2013 | Short Interest Feb 15 2013 | Change | %Change |
|---|---|---|---|---|
| Akamai Technologies (NASDAQ:AKAM) | 9,665,003 | 6,495,084 | 3,169,919 | 48.8% |
| Facebook Inc (NASDAQ:FB) | 28,492,068 | 25,392,181 | 3,099,887 | 12.2% |
| Micron Technology, Inc. (NASDAQ:MU) | 73,234,184 | 66,131,273 | 7,102,911 | 10.7% |
Data Source: Bloomberg
How do investors differentiate between companies that are bearish bets that will play out, and companies that will keep going up?
Akamai Technologies, Inc. (NASDAQ:AKAM)
Bearishness for Akamai rose by 48.8% between February 15th and February 28th. Shares are down nearly 9% for the month and nearly 12% for the quarter.
Akamai shares are dropping because Rackspace, which provides cloud bandwidth and content delivery network services, lowered the price of its bandwidth.
CEO Tom Leighton bought 80,000 shares in the last monthly period. The company forecast quarterly revenue and earnings consistent with a previous outlook. Akamai will also revise the way expenses are accounted for. Sales and marketing expenses will be included in the cost of revenue. This means that gross margins will reflect the expenses. Some of the Non-GAAP expenses will include the tax impact, when net income is reported. In the next quarter, the impact of the expense will hurt non-GAAP EPS by $0.05 per share.
Facebook Inc (NASDAQ:FB)
Bearishness rose for Facebook shares in February, increasing by 12.2%. Open volume is now 28.5 million shares. Since November 2012, Facebook has managed to squeeze out short-sellers after the company decided unilaterally to hold their shares. Short-sellers previously expected the company to flood the market with hundreds of millions of Facebook shares. This probably would have driven shares below $18.
In its recent quarter, the company impressed investors with its new initiatives in mobile that demonstrated revenue growth from advertising. Despite the potential for growth in its new initiatives, Facebook still faces challenges as it reduces its reliance on ads from desktop users. Facebook developed Graph Search, redesigned its news feed, and is reportedly adding automatic video playback on the feed. Wall Street Journal reported that Facebook will finally incorporate hashtags. This would make Facebook Inc (NASDAQ:FB) more effective in competing with Twitter.
The purpose of the timeline redesign is to give third party apps more exposure to users. This could drive usage, increase the time spent on the site, and improve revenue generation from apps.
Micron Technology, Inc. (NASDAQ:MU)
Short-selling in shares of Micron increased by 10.7%, to 72.2 million shares, by the end of February. Micron recently peaked at $9.75, as price increases for dynamic random-access memory (DRAM) helped push shares higher.
DRAM prices rose despite a weakness in the PC market. Helped also by higher NAND prices, Micron Technology, Inc. (NASDAQ:MU) is positioned to hold its gains if memory prices remain stable. Last year, NAND flash memory sales dropped 7%. HIS predicts sales in this industry will increase by 14%, or $22.4 billion. Ongoing strong demand for mobile devices like tablets and smartphones will assure NAND demand will remain strong in 2013.
Foolish
bottom line
Competition is rising for Akamai’s product and guidance was not as strong as investors hoped. The company is also shifting away from low margin contracts, and working to win more profitable businesses. This means that bears will have the upper hand in the short-term as the business transitions. Akamai is a company to avoid for now.
Short-sellers have an upper hand on Facebook. Shares appear to have peaked at $32 in January. There are three reasons Facebook’s core business will be hurt over the long-term. The rising usage for Google+, competition from Twitter, and risks associated with sustaining revenue growth from its mobile initiative will limit upside in its shares. Facebook Inc (NASDAQ:FB) is a company facing competition from many directions despite its initiatives, and should be avoided.
Despite the recent pull-back, Micron appears to be the company whose shares should have limited downside. A recovery in NAND and DRAM pricing will be especially beneficial for Micron. Micron recently closed its acquisition of Elpida and its financials are stable: Micron Technology, Inc. (NASDAQ:MU) refinanced $440 million of its debt in early-February by issuing convertible senior notes due in 2033. The issue will replace senior notes due in 2014 and pay 1.875%. Micron is a company to buy once selling pressure eases.
The article One Tech to Buy, Two to Avoid as Bear Bets Rise originally appeared on Fool.com and is written by Chris Lau.
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