Zoom Video Communications (ZM) is the third largest short in the Application Software Sector behind Salesforce.com (CRM) and Trade Desk (TTD) with active short selling ahead of its earnings results and a 206% rally in 2020. We follow 341 stocks in the Application Software Sector with $45.5 billion of total short interest. ZM short interest is $2.24 billion with 9.15% of its float shorted.
While short sellers in the overall Applications Software Sector have been trimming their exposure, ZM short sellers have been building their positions. The sector saw $550 million worth of net short covering over the last month, with short covering easing to just $47 million over the last week. ZM short sellers have separated from the pack and shares shorted increased by $20 million over the last month, but a compelling $144 million of net short selling in just the last week.
Short covering in the Application Software Sector can be explained very simply – the shorts are getting squeezed due to incurring significant losses over the last month. Sector shorts were down -$7.58 billion in mark-to-market losses, -18.35%, in May-June. These recent losses were 80% of their -$9.44 billion of year-to-date mark-to-market losses and spurred short sellers to cover some of their positions.
While ZM shorts incurred the worst monthly losses of the top twenty most shorted stocks in the sector, down -$739 million in mark-to-market losses, -42.59%, we saw an increase of +$144 million of short selling over the last week. ZM is the only stock in the sector with over a $ billion of mark-to-market losses for the year, down -$1.33 billion in 2020.
Short covering in the Application Software Sector can be explained very simply – the shorts are getting squeezed due to incurring significant losses over the last month. Sector shorts were down -$7.58 billion in mark-to-market losses, -18.35%, in May-June. These recent losses were 80% of their -$9.44 billion of year-to-date mark-to-market losses and spurred short sellers to cover some of their positions.
While ZM shorts incurred the worst monthly losses of the top twenty most shorted stocks in the sector, down -$739 million in mark-to-market losses, -42.59%, we saw an increase of +$144 million of short selling over the last week. ZM is the only stock in the sector with over a $ billion of mark-to-market losses for the year, down -$1.33 billion in 2020.
With losses mounting we should expect a broad based short squeeze in the Application Software Sector with total year-to-date mark-to-market losses nearing $10 billion. Several of the moist shorted stocks have topped -50% mark-to-market losses for the year and are the prime candidates for a short squeeze with ZM being o the top of the list.
Application Software Sector short squeeze candidates include Zoom Video Communications (ZM) down -114%; Docusign (DOCU) down -79%; Coupa Software (COUP) down -60%; RingCentral (RNG) -52% and Slack Technologies (WORK) down -50%.
Large and relatively sudden mark-to-market losses are a prime driver of short covering as short sellers\portfolio managers hit risk and loss limits and are forced to cover, at times in spite of still strong short conviction in the stock. A short seller may have single stock concentration limits as sell as single stock loss limits which will bring a tap on the shoulder from risk managers or controllers to shut down or trim trades.
We have seen increased recent short selling in ZM despite large mark-to-market losses, shorts may be having their last hurrah if ZM reports strong earnings. If -$1.3 billion of year-to-date mark-to-market losses have squeezed shorts out of their positions, a rally from better than expected ZM earnings will certainly send more short sellers packing.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
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