The tech market is always a great place to find plenty of stocks to short. As seen with operators like Nokia (NOK), BlackBerry (BBRY) and Yahoo! (YHOO), a highflier can quickly turn into a disaster.
But nowadays, there may be even more opportunities to find tech stocks to short, especially with the sheer variety of megatrends, such as cloud computing, Big Data, social, mobile and analytics. And venture capitalists with deep pockets have been plowing huge sums into startups to capitalize on these rapidly growing categories.
The result is that old-line tech companies are feeling more and more pressure. Just look at IBM (IBM), which reported its earnings this week. Revenues plunged by 14% to $19.28 billion, which was the 14th straight quarter of drops.
Now this does not mean that short selling is not without much risk. If anything, the practice should be used with moderation (probably no more than 10% of your portfolio). After all, if you are on the wrong side of a trade, the losses can be significant because of short squeezes (this is when short sellers have little choice but buy back stock to close out a position).
This was the case with Weight Watchers (WTW), whose stock surged because of an unexpected investment from Oprah.
OK then, what might be some interesting stocks to short in the tech space? Let’s have a look.
Tech Stocks to Short #3: eBay (EBAY)
Going into the latest earnings report, there was little confidence with eBay (EBAY). But the company was able to post a beat, which popped the stock by 12%.
But this is likely to remain a temporary thing. For the most part, the core business of eBay remains in neutral, as revenues declined about 2% in the latest quarter.
And this should not be a surprise, either. Of course, eBay must fight against biggies like Amazon (AMZN). What’s more, the competitive environment is likely to intensify as brick-and-mortar retailers boost their commerce efforts. Keep in mind that this was a key part of Walmart’s (WMT) latest announcement to the Street.
But eBay is also suffering from a perception problem — that is, the company’s brand is about auctions and vintage items. No doubt, such things are mostly niche. And eBay does not have other compelling features, such as a sophisticated delivery system. The company also has had to deal with the adverse impacts on traffic because of changes in the search algorithms from Alphabet’s (GOOG, GOOGL) Google.
Finally, eBay recently spun off its PayPal (PYPL) division, which was actually the part of the business that was showing much of the growth! So going forward, it’s tough to make a case that there will be much momentum for eBay.
Tech Stocks to Short #2: Oracle (ORCL)
Oracle (ORCL) is actually looking a lot like IBM. Both companies are trying to transition to new technologies, such as the cloud, but the results have been lacking.
For example, in the latest quarter Oracle reported a 2% drop in revenues. Even more troubling, there was the 16% plunge in new licenses.
Oh, and even the cloud revenues were far from inspiring. In the quarter, there was only a 29% increase (a measly 7% of overall revenues come from the cloud).
The problem is that Oracle’s rivals are not slowing down, as seen with the rapid growth with Workday (WDAY) and startups like FinancialForce.com. But even old-line operators, such as SAP (SAP), have been gaining ground. The company posted a 4% increase in license growth during the latest quarter and there was also a doubling of the cloud business.
Already, Wall Street analysts have been going bearish on Oracle stock. Brendan Barnicle, who is an analyst with Pacific Crest, lowered his rating to “sector weight” and thinks 2016 could be a tough year.
Next, the analysts at JPM Securities downgraded Oracle stock to a “market underperform” and set the price target at $31. Interestingly enough, the note indicated that there will probably be margin pressure because of the low-cost strategy of Amazon’s own thriving cloud business (it’s interesting how this company has a knack of making life tough for companies in various mature markets).
Tech Stocks to Short #1: Sprint (S)
Japanese billionaire Masayoshi Son is a legendary investor … but he certainly has had his share of utterly awful deals. Perhaps the most notable is Sprint (S).
Granted, Son is optimistic and recently said that there is “light at the end of the tunnel.”
Leaving investors scratching their heads and wondering just how long that tunnel is. But there are certain things that are tough to deny, even for Masayoshi Son.
Firstly, the market for Sprint is extremely competitive, with mega operators like Verizon (VZ) and AT&T (T) throwing their $180 million-plus market capitalizations around. No doubt, they have tremendous resources to engage in aggressive marketing, but also to add new businesses overnight through acquisitions.
Then there is T-Mobile (TMUS), which has been able to put together a novel marketing campaign that has been snagging subscribers left and right.
The result: Sprint has been relegated to the sidelines.
Rightfully so, as Sprint’s financials are downright awful. Which was a key part of why Moody’s recently lowered its rating on Sprint bonds from B1 to B3, six levels below investment-grade.
Going forward, Sprint will also likely need to raise more capital to manage its $12 billion-plus debt load and provide for ongoing needs for investment in the platform. In other words, this could mean more dilution for shareholders.
Which is to say, nothing seems to look good here — except for those investors that have a penchant for short selling.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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