Online businesses attract a lot of headlines and investor interest due to the massive growth stories the Internet has provided over the years. The recipe is easy. Take robust top-line growth, mix in relatively low fixed costs, bake for a few years to scale up, and out comes an incredibly successful business model. Unfortunately, this recipe, even when prepared by the best, makes a perishable meal that can spoil very quickly. Barriers to entry online are low and competitive pressures can mount seemingly overnight. When an online model appears broken or, at a minimum, severely impaired, you can always bet short-sellers will show up en masse. Below I've outlined a group of the most heavily shorted stocks in the Internet services arena. Let's dive into each one and figure out if the shorts are right, or due for a squeeze.
Short Interest %
Days to Cover
Source: Capital IQ.
Online restaurant bookings company OpenTable (NAS: OPEN) earns the award for most heavily shorted Internet stock, with the shorts representing 44% of outstanding shares. Trading at 40 times trailing earnings, bears are as convinced as ever that OpenTable's valuation is absurd in the face of increasing pressure from the likes of U.K.-based Livebookings and potential competition from Google, which purchased restaurant ratings company Zagat last September. Some recent business trends have also been somewhat disconcerting, with the latest quarter showing signs of decelerating growth and pricing pressures.
Travelzoo (NAS: TZOO) is a unique player in the daily deals arena in that it actually makes money. With healthy EBITDA margins of about 25% (something Groupon (NAS: GRPN) can only dream of at this point, given its heavy customer acquisition costs) the company has created a profitable niche in the travel vertical. So what's there to worry about? As evidenced by paltry revenue growth of 6% last quarter, increasing competition in the travel deals space might be too much for this one-trick pony to overcome.
Much to shareholders' chagrin, outperformance within this group means trading for more than $0.50 on last year's dollar. Down 23.6% in the past year, VistaPrint (NAS: VPRT) is this group's top performer by a long shot. That doesn't mean it has many fans, as some observers doubt VistaPrint's ability to continue growing organically while also facing margin pressures. One negative for VistaPrint is significant European exposure. A protracted recession would disproportionately hurt the small and medium-sized businesses VistaPrint targets. Advertising costs have risen steadily relative to revenue, and with new users accounting for 65% of the customer base, don't expect that margin drag to stop anytime soon.
Last but not least, we have Ancestry.com (NAS: ACOM) , whose shares fell hard and fast recently after NBC failed to renew Who Do You Think You Are?, a genealogy-related television show that was driving significant consumer interest for Ancestry's subscription services. Critics are convinced that this subscription-based business model is nothing more than a fad that can't stand the test of time. I called the shorts out on this one and went out on a limb with my recent thumbs-up CAPS call. With 21.2% short interest and a sizable 10 days to cover based on average trading volumes, I expect a significant short squeeze in the future as the company proves critics wrong by posting healthy subscriber growth numbers and reaping benefits from cross-selling products like its new AncestryDNA mapping service.
The Foolish bottom line
As you can see, each of these companies has meaningful work to do in order to win over investor hearts and minds. The shorts aren't always correct, and looking at the stocks they love to hate can be a great starting point for investors to do their own research. After all, there's nothing better than sticking it to the bears with a contrarian pick that works in your favor.
Speaking of bears, the negative sentiment surrounding Facebook is palpable, and at this point I'm not convinced it's overdone. Facebook has a lot to prove as a public company, but if you're looking for an online leader that's already proving itself, this company is a fraction of Facebook's size but boasts some revenue weapons the social-networking juggernaut probably wishes it had. Find out more about this company in our special report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Pick up your free copy today by clicking here.
At the time thisarticle was published Brenton Flynn has no ownership interest in the companies mentioned. The Motley Fool owns shares of OpenTable, Google, Facebook, and Ancestry.com.Motley Fool newsletter serviceshave recommended buying shares of Google, VistaPrint, Ancestry.com, Travelzoo, and OpenTable. The Motley Fool has adisclosure policy.
We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.