A crowded short can be defined as a stock in which a significant proportion of the float has been sold short. A 'short squeeze' occurs when the lack of supply and the sudden demand in the stock causes a sharp increase in the stock price, forcing the shorts to stop out and cover their positions, which in turn accentuates the price rise. If you want a real life example of a crowded short, look no further than Tesla Motors (NASDAQ:TSLA): As of March 15 2013, Tesla had a short interest of more than 32 million shares, which represents almost 50% of the public float. What happened yesterday with Tesla stock is what you call a short squeeze; the stock rose 16% on news that the sales of its flagship electric vehicle, the model S exceeded expectations. The short interest in BlackBerry (NASDAQ:BBRY) is lower than that in Tesla Motors' stock-around 32% of the float as of March 15. Nevertheless, the short side of the trade remains crowded and could see a similar action as seen in Tesla. Let's see how.
Tesla Motors is a company that produces high-end electric vehicles. The company's flagship product, the Model S, was launched in mid-2012 and has been in the news ever since. The Model S has received mostly excellent reviews from various auto websites and magazines; it was awarded Car Of The Year by Motor Trend magazine, Automobile Magazine and Yahoo! Autos. Recently the Model S was also crowned the Green Car Of The Year at the New York Auto Show. In addition to winning accolades from professional reviewers, the electric vehicle has also received extremely positive reviews from owners and test drivers who have reported their experiences on Seeking Alpha as well as on various forums on the Internet. Well, if Tesla has really launched such a great product in Model S, why were (and are) so many investors betting against the company? That is a legitimate question to which there is no single answer. Range anxiety is often blamed by short sellers as the peril that would de-rail the Model S. However, this anxiety appears to be concentrated among the short sellers themselves, most of who have not bought or even test driven the car. One would only have to read countless reviews from owners who are extremely happy with Tesla's range. This is in addition to surveys, which show that 95% of the American drivers' aggregate daily journeys are below 120 miles, which is well within the Model S range options. Some short sellers also believe the myth that electric vehicles' performance is inferior to similarly priced Internal Combustion Engine vehicles. Again, you would have to try the car yourself, or read user reviews to be proven otherwise. Tesla's critics also have a misconception that the company needs to completely replace its ICE competitors to make money, not realizing that Tesla can enjoy high gross margins on its premium and revolutionary products while other car-makers try to catch up. To sum up, the Model S skeptics and Tesla short sellers are applying previous electric cars' criticisms to this car without realizing that Tesla has completely revolutionized the electric car industry by making a product that is leaps and bound ahead of its direct competitors'. From here on, Tesla's products can only get better as it takes advantage of improvements in technology.
Although BlackBerry is a completely different company when compared to Tesla, in the current environment it does share some characteristics with the car-maker. Much like Tesla, BlackBerry has also recently launched a new product, the BB10 OS and devices based on this platform, in a bid to reestablish itself in the smartphone industry. And similar to the Model S, the BB10, or specifically, the BlackBerry Z10 strongly divides opinion amongst investors. The BB10 OS and the BlackBerry Z10 have received fairly positive reviews from most websites and blogs, especially for its innovative and intuitive gesture based user interface. Those who have bought the Z10 absolutely love the device, which can be seen from the user reviews on AT&T (NYSE:T), Best Buy (NYSE:BBY) and Verizon (NYSE:VZ). However, as with Tesla, BlackBerry garners a high interest from short sellers who argue that at best, BlackBerry can only meet the demand from a small niche of corporates and BlackBerry loyalists and cannot do anything to counter the Android (NASDAQ:GOOG)-iOS (NASDAQ:AAPL) dominance. What they don't understand is that BlackBerry is not looking to immediately dismantle Android or iOS; even gaining a small chunk of the market share could give significant upside to BlackBerry stock given the low expectations. And the company was proud to reveal in its earnings conference call that 55% of the Z10 users were switching from Android or iOS. Moreover, most of these people have not even tried the Z10 to realize its simplicity and elegance as compared to its competitors; therefore the short sellers have this preconceived notion that the BB10 would get a poor reception given its recent failures with top-end smartphones and the PlayBook.
As an investor focused on technology stocks, an important lesson I have learned in the past few years is that this industry is very volatile-the dynamics change rapidly and you have to change your thesis accordingly. Just look at Apple; there were people who believed, and some still continue to do so, that no one can counter Apple's dominance in mobile; and look at Android now. Then there are some who argue that no one can challenge Android because it is open source. We will see about that.
I am a tech enthusiast; I have been following electric vehicles for a long time and have tried driving many of them but was not impressed by their performance, their feel and their battery life. So before driving the model S, I was also among the people who had serious doubts about the EV industry as a whole and Tesla in particular since it only produces electric vehicles. However, after driving the car I realized that this was not an ordinary EV, this car was at another level with its feel and performance, and I immediately changed my thesis on Tesla. I had the same experience with BlackBerry; I have been a happy iPhone user and still have nothing to complain about it except that I'm bored of seeing the same interface in every iteration of the iPhone. However, when I tried the BlackBerry Z10, I immediately fell in love with its differentiation from the iOS/Android experience with the refreshing simplicity of gesture controls. It may be too late for BlackBerry to revolutionize the smartphone market, but I still believe that the BB10 is good enough to attract millions of buyers, which will make the company profitable and drive up the stock price.
Tesla shorts were squeezed yesterday after the company revealed that a lot more people were buying the Model S than the short sellers had expected. BlackBerry also revealed in its Q4 earnings report that there is significant interest in the BlackBerry Z10. Although it is still too early to judge the success of BB10, I would advise short sellers to understand that they are part of a crowded trade, so do not assume that the BlackBerry 10 will fail simply because of the company's failure in the recent past whilst oblivious to the product quality and reviews, because as Tesla Motors has shown, if the product is good enough, it will sell.
Disclosure: I am long BBRY.
Business relationship disclosure: This article was written by Dividend Pros' analyst covering technology.