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Jan 26, 2017

S3 BLACKLIGHT: Shorts Selling into Alphabet’s Rally Ahead of Earnings

Alphabet Inc.’s (GOOG US) stock price is up 7.8% in January after a disappointing return of 1.7% in 2016. Short interest fell $780 million, or 31%, in 2016, but short sellers have been selling into this mini rally and put on $377 million of new shorts, up 21% in January. GOOG short interest is now at $2.14 billion, the first time its short interest has topped $2 billion since May 2015.

With 4th quarter earnings to be released after the close on Thursday, these short sellers may be looking for some disappointments in Alphabet’s performance. Analysts are expecting earnings of $9.64/class A share on $25.23 billion in revenues – an increase of 11.19% and 18.28% respectively.

Short sellers may be seeing ad revenues already at such high levels and may be wondering if Alphabet has left itself any room for significant growth. One of Alphabet’s product lines, cloud computing, has room to grow, but faces stiff competition from the top two providers, Amazon’s Web Services and Microsoft’s Azure. Alphabet has poured money into this product line with investments in storage, artificial intelligence and high speed network access. A final product line which may be intriguing to short sellers is the 4th quarter launch of their Pixel smartphone. With $1 million of projected sales in a declining phone market, Alphabet may not be able to meet relevant bottom line returns, even with 15% margins on its phone sales.

According to Factset, GOOG’s average year-end target price is $966.29, an increase of 16.14%. Shorts are seeing a temporarily overbought situation, which could give up its recent gains if earnings don’t meet expectations.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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