Investors skeptical of a company's future prospects can borrow its shares and sell them short. If the business unravels and the stock declines, their brokerage account could benefit.
Almost every publicly traded company is being sold short by some investor somewhere, but some stocks attract far more interest from short sellers than others. Investors can track this through short interest, a metric that compares the percentage of a company's shares, with the number of its shares that have been sold short. Short sellers aren't always right -- indeed, they're often wrong -- but investors should watch short interest closely, as it can provide a powerful signal that a large number of market participants believe that a given stock is overvalued.
A commodity business, or a specialized platform?
Nearly one-quarter of Box's floating shares (24.86%) were sold short as of the end of May.
Box's business has long been plagued by fears that the company is simply selling a commodity. Certainly, its core business -- cloud storage -- has become commoditized, with a whole host of larger companies selling cloud storage solutions at increasingly attractive prices. In response, Box's management has worked to differentiate its offerings by building a platform of features that help its cloud storage stand out among its many rivals. In particular, Box has worked to court businesses by designing industry-specific solutions and has worked with developers to integrate applications with its storage service.
Still, investors are skeptical, and so far, they've been right. The company, which went public early last year, has been a disappointment for investors, shedding about half its value since January 2015. Box's sales have grown rapidly, but not to the degree that many analysts had expected. At the same time, the company remains unprofitable: Last quarter it lost $46.6 million, about half its quarterly revenue.
There might be too much hype for this self-driving car play
More than one-quarter (25.03%) of Mobileye's floating shares were sold short at the end of last month. That's particularly notable for a company as large as Mobileye -- its market cap stands at around $9 billion, making it the largest company on this list by a fairly sizable margin.
Over the last year, shares of Mobileye have shed more than 20%. Still, the company remains aggressively valued, as it trades with a trailing price-to-earnings ratio around 120. For a long time, Mobileye has been seen as a way to invest in the coming self-driving car revolution: Mobileye is an automotive supplier, and the products it mostly supplies (monocular cameras) are often employed to give existing automobiles self-driving functionality. But Mobileye faces stiff competition from other suppliers, and in particular, other technologies -- notably LIDAR, a sort of light-based radar favored by Google for its own self-driving cars.
Mobileye is profitable, and it's growing quickly -- revenue rose about 65% on an annual basis last quarter. But it isn't as profitable as many other automotive companies or other automotive suppliers. If the shift to self-driving cars doesn't benefit Mobileye the way some envision, investors could be burned.
This cloud software provider isn't profitable
At the end of May, 15.71% of NetSuite's floating shares had been sold short.
NetSuite sells an integrated suite of cloud software aimed at medium-sized businesses. Its offerings run the gamut to include human resources, CRM, finance, and marketing solutions. Last quarter, NetSuite's revenue rose 31% on an annual basis as it added 372 new customers, an 8% increase from the same quarter last year.
Still, NetSuite stock has performed poorly over the last year, falling more than 18%. Unfortunately, NetSuite isn't profitable and hasn't been throughout its entire history. Revenue growth remains paramount, and if sales slow, shareholders could suffer. There's clearly demand for NetSuite's offerings, but competition is intense. Short sellers may be betting that the company's rapid growth will slow.
The market for traditional PCs remains pressured
As of the end of last month, 26.41 million shares, or 18.2% of Logitech's float, had been sold short.
As one of the largest sellers of PC peripherals in the world, Logitech is an indirect player in the market for traditional PCs. PC keyboards and mice generated almost one-fourth of Logitech's sales last quarter, and related products like pointing devices, speakers, gaming products, and webcams generated more than half of sales. Logitech has other products, such as portable bluetooth speakers, smart remotes, and tablet accessories. But its exposure to the traditional PC cannot be understated. Unfortunately, sales of traditional PCs continue to fall: Research firm IDC believes PC shipments will slide 7.3% this year.
Logitech is profitable, pays a healthy dividend, and is valued roughly in line with the broader market. But if PC shipments continue to decline, the business could suffer.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends NetSuite. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.