11 Apr 3 Tech Stocks with Downside Potential to Short
When markets start to overvalue a company, a certain segment of traders move in to bet on downside potential – they do this by shorting the stock. This is most prominent amongst stocks that are caught up by significant headwinds, or in the case of tech stocks, a shift in momentum following lofty growth expectations. Here’s a look at three tech stocks where momentum prevails to the downside as investors and traders avoid their respective overvaluations.
Square: Yet to make a profit, and with little signs of doing so any time soon, traders have expressed serious doubts about the financial services and mobile payment business. Nearly 30% of the company’s shares were sold short last month, while the business’s core product is less of a differentiator than its supplementary offerings, which themselves only contribute to 20% of revenue.
Gogo: As with Square, Gogo has indicated little prospect of a near term profit. While the general demand for WiFi services has increased and looks likely to continue doing so, the business has yet to benefit, and is facing tough competition. Traders were quick to punish the company in light of its legal battle with partner American Airlines, while the company’s short activity just under 29%.
Fitbit: Although sales and earnings for the personal metrics device manufacturer are encouraging, the company faces an array of uncertainty and challenges within a dynamic market. Smartphone and smartwatch manufacturers are providing a similar if not superior alternative, while Fitbit remains under price pressure from low cost competitors. With these challenges present, and an uncertainty surrounding where future revenue growth will come from, traders are reluctant to agree with the company’s price-to-earnings ratio of 19 – reflected in the stock’s 21.54% short activity last month
While I am currently not shorting any of these stocks, I may engage in short positions over the next few weeks as these once high flying stocks are being avoided by traders and investors alike.