Short Sellers Jump on Apple, Microsoft Ahead of Earnings

After markets close Tuesday, Microsoft Corp. (NASDAQ: MSFT) is set to report first-quarter results. Apple Inc. (NASDAQ: AAPL) will report its fiscal second-quarter results after markets close Wednesday.

For the quarter, analysts expect Microsoft to report earnings per share (EPS) of $1.78 on revenue of $41.03 billion, increases of 27% and 17%, respectively, year over year. Consensus estimates call for Apple to post EPS of $0.99, up by about 35% year over year, on sales of $77.35 billion, a year-over-year jump of nearly 33%.

Short sellers have made big bets that both companies are going to disappoint investors and their share prices will fall once the numbers are released.

Short interest in Microsoft jumped 26% in the two-week reporting period that ended April 15. About 61.2 million shares were short, representing 8.82% of Microsoft’s total float. At the same time that short interest was galloping ahead, Microsoft’s share price increased by 10%, making the stock even more attractive to short sellers.

In the same period, short interest in Apple stock also rose by 26% to 127.9 million shares, representing about 0.76% of the company’s total float. Apple’s share price rose by 10% in the two-week period, again giving short sellers additional incentive to short the stock.

As of Monday night’s closing bell, Microsoft stock has added almost 11% to its share price since March 31, the closing date for the prior report on short interest. Apple has added about 10.3% to its share price during the same period.

Since mid-March, nine brokerages have either initiated coverage on Microsoft or raised their 12-month price targets on the stock. All rate the stock a Buy, and the average price target is around $290 a share. Microsoft stock closed Monday at $261.55, implying an upside potential of nearly 11%. The price target range on the stock is $180 to $330

Six brokerage firms have weighed in on Apple since the beginning of April, with one (Goldman Sachs) maintaining a Sell rating on the stock and setting a price target of $83, the lowest of any firm covering the stock. Apple shares would have to drop more than $50 based on last night’s closing price of $134.72 to fall to that level. Evercore ISI and Wedbush both have 12-month price targets of $175 on Apple shares, the highest among the firms, implying an upside potential of nearly 30% on the stock.

Last week Bloomberg reported that the median short interest in S&P 500 stocks is a paltry 1.6% of market value, near a 17-year low. Some of that is due to the attack on short sellers in late January and February that forced the shorts to buy the stocks at more than they had expected to pay in order to forego even bigger losses.

Another factor in the low levels of short interest is the bullish behavior of the smart money. Hedge funds are betting heavily on share prices going up.

Add to these the reopening of the U.S. economy and the massive relief and stimulus packages, and it’s easy to see why big money bets against equities are scarce. As Benn Dunn, president of Alpha Theory Advisors, told Bloomberg: “There’s just mass euphoria. No one wants to get their head ripped off by a short anymore.”

No one, it seems, except those betting against Apple and Microsoft.