Apple (NASDAQ: AAPL) and Qualcomm (NASDAQ: QCOM) dropped the bombshell announcement yesterday that the two companies have settled their differences, ending an increasingly acrimonious legal dispute that had been dragging on for over two years. The fight had threatened Qualcomm's fundamental business model, with the legal risk creating an overhang on Qualcomm shares. It should come as no surprise that short-sellers had been piling on the mobile-chip giant, hoping to profit on Qualcomm's woes.
Qualcomm's short interest spiked precipitously late last year, although that bearish sentiment could have been more related to the insane volatility the broader market was experiencing as it pulled back in the fourth quarter, as it often hits the tech sector hardest. The shorts that remain are now getting crushed by the settlement-related rally, with shares up nearly 40% since Monday's close.
Bears are getting squeezed
S3 Analytics, which specializes in measuring short-selling activity, estimates that short-sellers collectively suffered $228 million in mark-to-market losses yesterday, not including today's surge.
$QCOM short interest is $983 mm; 17.20 mm shares short. Shorts are down $228 million in mark-to-market losses today, wiping out the $90 million in 2019 mark-to-market profits they had earned prior to today's surprise price move. Full research note on https://t.co/chSvIQPOnM pic.twitter.com/K6vDRk3RuS — Ihor Dusaniwsky (@ihors3) April 16, 2019
After enjoying $1.34 billion in mark-to-market profits last year, many short-sellers have been paring back their exposure, according to S3. The bears were happy to pocket some profits and reduce their risk associated with the Apple dispute, the outcome of which clearly had potentially monumental consequences. Apple was arguing that Qualcomm's underlying business model of licensing technology while also selling chips was fundamentally illegal, after all, but at the same time a settlement was always a possibility, however remote.
Many of those short-sellers are now scrambling to cover their positions, pushing the price up even farther in a short squeeze. "Seeing that QCOM shorts were actively covering their positions all year long we should see continued accelerated short covering in the near term, juicing QCOM's stock price even higher as long shareholders continue bidding up its stock price," S3 writes. "This should result in a quick sudden short squeeze for all the shorts left in the trade."
That could include Kerrisdale Capital, an activist short-seller that laid out a bearish thesis in January that argued that Qualcomm was "teetering on the brink of disaster" and that its business model was "living on borrowed time." Considering the mounting legal risk, Kerrisdale argued that if the judge in the Federal Trade Commission's antitrust suit ruled against Qualcomm, shares would be worth a mere $21 -- roughly half of where they were trading at the time. It's unclear if Kerrisdale was still short when the settlement was announced.
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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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