Twilio, Inc (TWLO US) was upgraded to overweight by Morgan Stanley analyst Meta Marshall today based on potential growth in its next-gen cloud software products. The stock is up over 2% today after it fell over $40 since its recent highs in late August.
TWLO is the largest short in the domestic Internet Services and Infrastructure Sector with $1.73 billion of short interest; 15.43 million shares shorted which is 13.07% of its float.
Short sellers have been aggressively selling into the stockâ€™s spring\summer rally with shares shorted more than doubling over that time period. Since March 1st, shares shorted increased by 8.23 million shares, +114%, and are up 2.30 million shares, +17.5%, over the last 30 days. While TWLO shorts are up $224 million in mark-to-market profits in September, they are still down $166 million year-to-date.Â Todayâ€™s over 2% price move cost shorts $40 million in mark-to-market losses.
If todayâ€™s upgrade entices longs to build their positions in the stock we may see a pullback in short selling and, depending on the traction of todayâ€™s price move, a short squeeze is possible. Shorts have been steadily building their positions for almost seven months and their recent profitability had wiped away almost two-thirds of their earlier year-to-date losses and buoyed their confidence in their short thesis. If a rally with legs materializes and begins to deepen their year-to-date losses some short sellers may choose to cut bait early in an attempt to realize some of their recent gains. This short covering would only exacerbate long shareholding buying pressure and push TWLOâ€™s stock price even higher. Possibly pushing even more short sellers into covering their positions and creating a crowded march for the exits.
There was a large increase in TWLO shares shorted in the 2nd and 3rd quarters, a solid rally in the stock may create a squeeze that could undo several months of short selling activity. But, if todayâ€™s rally loses steam, shorts may take this as a sign of minimal support on the long side and continue their short selling spree.Â TWLOâ€™s price action in the near term will determine whether momentum shorts stay in or get out of their trades.
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Managing Director Predictive Analytics, S3 Partners, LLC
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