After AMC Stock Rise, Are These 3 Companies Next to Short Squeeze?

It was an extremely successful year for some private investors. like stocks AMC entertainment and GameStop have skyrocketed on short squeezes – meaning that rising share prices have forced investors who were betting against the shares to close out their positions by buying shares, creating even more upward pressure on share prices.

However, when an underlying business isn’t really growing, a short squeeze is often just a temporary catalyst. Over the long term, that could be the case for AMC and GameStop if their rebounding stock prices ultimately don’t match business growth.

Three more stocks targeted by short sellers are are growing CrowdStrike Holdings (CRWD 11.79%), stitch fix (SFIX 12.12%)and PubMatic (PUBM 16.16%). Here’s why they might be next for a quick squeeze.

Image source: Getty Images.

1. CrowdStrike: The high-flying cybersecurity company that can’t be grounded

Admittedly, CrowdStrike has the lowest short interest of the three companies on this list. Stocks that are short (when an investor is betting against a company) account for about 6% of total outstanding shares (the number of shares outstanding in a company), although the number has continued to rise in recent months.

The reason the company is being targeted by short sellers? CrowdStrike is valued at over 47x trailing 12-month revenue and over 147x trailing 12-month free cash flow. It’s an incredibly high premium that’s pricing in double-digit percentage growth in the years to come. And this story is not new. In the recent past, other cybersecurity companies entered the market as public companies early on, only to lose their status as high-growth companies a year or two later. When that happens, stocks tumble. fire eye is just one example, losing about half of its value in 2015 as it experienced a rapid cooldown.

Until now, however, CrowdStrike and its cloud-computing-based endpoint security suite have been a different story altogether. Now, a few years after its IPO, the company is still expanding at a rapid pace. Not only cloud-based software is in high demand, but also security that covers employees regardless of their workplace. And in a digitally driven world, new ways to keep data away from those with nefarious intentions are more important than ever.

This plays right into the hands of CrowdStrike. For the first quarter of fiscal 2022 (the three months ended April 30, 2021), annualized revenue increased 74% year over year to $1.19 billion. And even as spending to maximize growth remained high, free cash flow was $117 million during the period — good for an enviable free cash flow margin of nearly 39%.

CrowdStrike doesn’t have the hefty short interest that sent AMC’s stock into the stratosphere, but it’s an above-average percentage that could see the stock pop if it continues to post the kind of results it did at the start of the new fiscal year has achieved. With cybersecurity requirements expected to only get more complex in this new cloud era, CrowdStrike still has many opportunities ahead.

2. Stitch Fix: A resurgence in clothing shopping

The world’s leading retailer of personalized apparel was also beaten by short sellers. As of this writing, short interest sits at 12% of outstanding shares, despite consumers spending heavily on clothing this year after forgoing new threads during the 2020 pandemic lockdowns. The US Census Bureau reports that apparel spending rose 58% through the end of April.

A big reason for betting against this growing apparel company is a downgrade in management’s full-year guidance in March — sales growth expectations were cut to 20% from as high as 25%. Plus Stitch Fix shares soared in early 2021. In other words, the company’s valuation had outgrown itself and a downgrade was in order.

However, Stitch Fix is ​​still on the right long-term course and the stock is showing signs of life again. The stock is up a double-digit percentage after an excellent report for the third quarter of fiscal 2021 (the three months ended May 1, 2021). Revenue rose 44% year over year to $536 million as it overcame weak financials since the start of the COVID-19 pandemic. That’s impressive: The company actually stayed in growth mode over the past year, even as many of its brick-and-mortar competitors suffered. Additionally, the full-year revenue guidance was adjusted again, this time again raising it to about 21% year-over-year growth.

Various pieces of clothing from the Stitch Fix Spring 2021 collection are laid out on a white background

Some of the garments from the Spring 2021 Children’s Collection on Stitch Fix. Image source: Stitch Fix.

Stitch Fix looks like a reasonably priced growth stock at just over three times expected year-to-date sales as of its latest update. It’s not profitable yet, but if it lives up to its latest financial guidance and continues to grow rapidly when the economy reopens, this stock could have another leg up.

3. PubMatic: An under-the-radar digital advertising platform

Digital advertising software company PubMatic, which went public in December 2020, was also targeted by short sellers. As of this writing, about 7% of its outstanding shares were short. After making its public debut late last year, PubMatic stock skyrocketed, nearly tripling at one point in a matter of months. Suffice it to say that expectations had to come back down to earth.

And that’s exactly what happened. PubMatic stock is now back where it started in December, but the company itself has had a great start to 2021 with a 130% retention rate (which means existing customers have spent 30% more on PubMatic’s cloud-based ad management software than in 2020). The massive migration to TV streaming is at the heart of this tremendous growth rate, and with most TV ads still being placed through traditional linear formats (like cable), there’s still a lot of potential here.

The pace of expansion will accelerate in the second quarter as PubMatic also begins to beat last spring’s financial results, a time during the first pandemic lockdowns when marketing briefly stalled. PubMatic expects revenue to grow at least 70% year over year. Add to that a robust bottom line (free cash flow was $9.4 million in Q1, or 22% of revenue) and a balance sheet with $1.1 billion in cash and cash equivalents and no debt, this is a solid cloud software company.

As of this writing, PubMatic is trading at 9 and 53 times trailing 12-month sales and free cash flow, respectively. That’s a pretty good long-term deal for a fast-growing company in an industry that’s capitalizing on secular trends as ads and marketing campaigns migrate to online formats. If short sellers start to close their bets, it could be another tailwind that pushes this stock higher.

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