It's been a wildly successful year for some retail investors. Stocks like AMC Entertainment and GameStop have skyrocketed higher because of short squeezes -- meaning that rising share prices have forced investors who've bet against the stocks to close out their positions by buying shares, creating even more upwards pressure on the share prices.
However, if an underlying business isn't actually growing, a short squeeze is often only a temporary catalyst. Over the long term, this could be the case for AMC and GameStop if their resurgent share prices don't eventually equate to business growth.
Three other stocks targeted by short-sellers that are growing, however, are CrowdStrike Holdings (NASDAQ:CRWD), Stitch Fix (NASDAQ:SFIX), and PubMatic (NASDAQ:PUBM). Here's why they could be next for a short squeeze.
Image source: Getty Images.
1. CrowdStrike: The high-flying cybersecurity firm that can't be grounded
Admittedly, CrowdStrike has the lowest short interest of the three companies on this list. Shares sold short (when an investor bets against a company) sit at about 6% of total shares outstanding (the number of shares of a company in circulation), although the figure has been creeping higher in recent months.
The reason the company is being targeted by short-sellers? CrowdStrike is valued at over 47 times trailing 12-month sales and over 147 times trailing 12-month free cash flow. It's an incredibly lofty premium that prices in double-digit-percentage growth for years to come. And this story isn't new. In the recent past, other cybersecurity firms were off to the races early on as public companies, only to give up their high-growth status just a year or two later. When that happens, shares take a dive. FireEye is just one example, losing about half of its value back in 2015 when it experienced a fast cool off.
So far, though, CrowdStrike and its cloud computing-based endpoint security suite have been a very different story. Now a few years out from its IPO, the company is still expanding at a torrid pace. Not only is cloud-based software in high demand, but security that covers employees no matter where they're working is too. And in a digital-first world, new methods to keep data out of the hands of those with nefarious intent is more important than ever.
This plays right into the hands of CrowdStrike. During the first quarter of fiscal 2022 (the three months ended April 30, 2021), annualized revenue surged 74% higher from a year ago to $1.19 billion. And even as spending to maximize growth stayed high, free cash flow during the period was $117 million -- good for an enviable free cash flow profit margin of nearly 39%.
CrowdStrike doesn't have the high short interest that sent AMC's stock into the stratosphere, but it is an above-average percentage that could cause the stock to pop if it keeps posting the kind of results it did to kick off its new fiscal year. With cybersecurity needs only expected to keep evolving in complexity in this new cloud era, CrowdStrike has plenty of opportunities ahead of it still.
2. Stitch Fix: A resurgence in apparel shopping
The world's leading personalized apparel retailer has also been beaten up by short-sellers. Short interest as of this writing is at 12% of shares outstanding, even though consumers are spending heavily on clothing this year after foregoing new threads during pandemic lockdowns in 2020. The U.S. Census Bureau reports apparel spending is up 58% through the end of April.
A big reason for the bets against this growing apparel company is a downgrade in management's full-fiscal-year guidance back in March -- sales growth expectations were lowered from as much as 25% down to 20%. Plus Stitch Fix stock spiked in value at the start of 2021. Put another way, the company's valuation had gotten ahead of itself, and a pullback was in order.
However, Stitch Fix is still on the right long-term trajectory, and shares are showing signs of life once again. The stock was up by a double-digit percentage following a stellar fiscal 2021 third-quarter report (the three months ended May 1, 2021). Revenue was up 44% year over year to $536 million as depressed financials from the start of the COVID-19 pandemic were lapped. This is impressive: The company actually remained in growth mode last year even as many of its brick-and-mortar peers suffered. Additionally, full-year sales guidance was adjusted again, this time getting bumped back up to about 21% growth over last year.
Some of the clothing items from the Spring 2021 kids collection on Stitch Fix.Image source: Stitch Fix.
Stitch Fix looks like a reasonably valued growth stock after the latest update at just over three times expected current-year revenue. It isn't profitable yet, but if it delivers on its latest financial guidance and continues to grow at a rapid pace as the economy reopens, this stock could soar higher once again.
3. PubMatic: An under-the-radar digital advertising platform
Digital advertising software firm PubMatic, which had its IPO in December 2020, has also been under attack from short-sellers. As of this writing, about 7% of shares outstanding were sold short. After making its public debut at the end of last year, PubMatic stock soared, nearly tripling in value at one point within a couple of months' time. Suffice to say expectations needed to come back down to earth.
And that's just what has happened. PubMatic stock is now back where it started in December, but the company itself is off to a great start in 2021. Revenue grew 54% year over year to $43.6 million during the first three months of the year, driven by a net dollar-based retention rate of 130% (implying existing customers spent 30% more on PubMatic's cloud-based ad management software than they did in 2020). The massive migration to TV streaming is at the heart of this huge growth rate, and with most TV ads still being placed via traditional linear formats (like cable), there's still lots of upside here.
The rate of expansion will accelerate in Q2 as PubMatic also starts to lap financial results from last spring, a period during the first pandemic lockdowns when marketing briefly ground to a halt. PubMatic said to expect revenue to grow at least 70% year-over-year. Add to the mix a robust bottom line (free cash flow was $9.4 million in Q1, or 22% of revenue) and a balance sheet with $1.1 billion in cash and equivalents and no debt, this is one solid cloud software business.
As of this writing, PubMatic trades for a respective nine and 53 times trailing 12-month sales and free cash flow. That's a pretty good long-term deal for a fast-growing company in an industry benefiting from secular trends as ads and marketing campaigns migrate to online formats. If short sellers start to close out their bets, it could be another tailwind that pushes this stock higher.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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