Why Short Interest in Marvell Soared

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During the two-week short interest reporting period that ended November 30, Marvell Technology Group Ltd. (NASDAQ: MRVL) saw its share price jump nearly 13%. During that two weeks, Marvell announced a $6 billion acquisition of communications and networking chipmaker Cavium Inc. (NASDAQ: CAVM) and reported third-quarter results that beat estimates.

Shares even posted a new 52-week high of $24.22, a price the stock hadn’t seen in more than 10 years.

All the good news for Marvell turned out to be good news for short sellers as well. Short interest in the company’s stock increased by 181%, jumping from 11.5 million to 32.27 million with days to cover remaining unchanged at around two. Average daily volume, however, soared from just over 7 million to nearly 21 million.

The deal for Cavium gave the share price its biggest boost. Marvell’s $6 billion offer works out to $40 a share in cash and $40 a share in Marvell stock (about 2.2 Marvell shares for each Cavium share). Marvell forecast that combined revenues will reach $3.4 billion, an increase of about $1.1 billion over Marvell’s 2016 revenue of $2.3 billion.

The acquisition also broadens Marvell’s customer base from its traditional storage market into communications and networking. That’s good, but also puts the company in competition with some much bigger players like Broadcom and Qualcomm that could get even bigger if Broadcom’s hostile takeover attempt at Qualcomm succeeds.

Short sellers might be reckoning that even if Marvell’s deal with Cavium is consummated, the resulting firm is still going to be much smaller than either Broadcom or Qualcomm before any merger of the two.

Marvell’s share price jump was just too much for the shorts to resist. And with daily volume tripling, the shorts now have a really liquid stock to play with. At this morning’s price Marvell’s shares are tabbed to rise by 24% in the next 12 months. That will attract a lot more attention for investors who are bullish on the stock, making a fertile field for short sellers.

Marvell’s stock closed at $22.05 on Monday, essentially flat, and was inactive in Tuesday’s premarket trading. The stock’s 52-week trading range is $13.83 to $24.22 and the consensus price target on the shares is $27.33.