U.S. short exposure declined in August with total short interest declining by $41.5 billion to $958.7 billion during the month, a 4.2% reduction in overall short exposure. The Information Technology sector had the largest decrease in short interest by sector, with a $14.2 billion drop to $184.5 billion. And within the Information Technology sector, the Application Software sub-industry had the largest drop in short interest, a $3.0 billion decline in short exposure to $36.8 billion.

The largest decreases in short exposure in the Application Software sector occurred in the usual suspects: Zoom Video Communications (ZM), Salesforce (CRM) and Palantir Technologies (PLTR) and the largest increases were in Trade Desk (TTD), Workday (WDAY) and Datadog (DDOG). But smaller cap stocks like Digimarc (DMRC) have also shown some interesting activity on the short side. DMRC has the ninth largest SI % Float in the Application Software sector at 16.27%.

Short Interest in the Application Software Sector (as of 09.07.22)

Along with a high SI % Float, DMRC currently has the second largest 90 Days-To-Cover in the Information Technology sector. Daily volume for the past three months has averaged 116,000 shares per day. With short interest at 2.22 million shares, this equates to 18.64 days to cover.

Days to Cover: Information Technology (as of 09.07.22)

The combination of high SI % Float and high Days-To-Cover show DMRC’s relative illiquidity in regard to its capital structure and short-side exit trading potential.

DMRC shares shorted hit their historical high of 2.66 million shares on 12/31/19. We saw steady short covering in 2020 and shares shorted hit their recent low of 1.38 million shares on 12/31/20. This was a -48% decrease in shares shorted as DMRC’s stock price rose +41%. DMRC and short sellers were squeezed out of their positions as mark-to-market losses accumulated in 2020.

DMRC shares shorted increased steadily in the early part of 2021, hitting a high of 2.49 million shares on 5/13/21, an +80% increase in shares shorted as DMRC’s stock price fell -40%. We saw short covering begin as DMRC’s stock price stabilized around the $30-$35 level, and short covering accelerated as its stock price hit its recent high of $53.49 in early November 2021. Short selling once again increased as DMRC’s stock price trended downward once again. Shares shorted peaked in mid-March at 2.54 million shares and have been trending downward as DMRC’s stock price found support levels first at $22-$27 and now at $13-$17. DMRC’s recent breakout over $20 spurred a surge of short covering and shares shorted are now 2.22 million shares.

DMRC: Short Interest vs Stock Price

DMRC’s short interest is now $39.78 million, 2.22 million shares shorted, 16.27% Short Interest % Float. Stock borrow fees are trending between the 1.25% to 1.50% fee range as stock loan utilization has remained between the 72% to 80% range for over three months. Overall, DMRC shares shorted have increased by 64,000 shares in 2022, a +3.0% increase in shares shorted as its stock price fell -55%. Even as DMRC’s stock price fell significantly, short sellers were not drawn into maintaining their short exposure and were satisfied seeing their Short Interest % Float drop by a third from 24.31% to 16.27%. A strong short thesis should have seen the SI % Float maintain its level or increase as DMRC’s stock price fell. This was due to the company completing a 2.25 million share equity offering in April 2022.

Short side activity over the last month reflects this lack of short side conviction with 85,000 shares bought-to-cover, a 3.7% decrease in shares shorted as DMRC’s stock price rose +13.7%. We had seen increased short selling after Q3 2021 and Q4 2021 earnings releases but short covering after the Q1 2022 and Q2 2022 releases, a possible response to the efficacy, full stack functionality and early adoption of its newly launched products, including Digimarc Recycle and Digimarc Brand Integrity.

DMRC short sellers have had a profitable 2022 with $49.4 million of year-to-date mark-to-market profits, up +90.6% on an average short position of $54.5 million. But in August we saw those profits trimmed due to $6.1 million in month-to-date mark-to-market losses, a -14.7% return on an average short interest of $41.5 million.

These recent losses have made a moderately crowded short much more squeezable. DMRC is the fourth most crowded short and the second most squeezable stock in the Application Software sector.

DMRC is the 4th Most Crowded Short in the Application Software Sector

DMRC is the 2nd Most “Squeezable” Short in the Application Software Sector

Digimarc is a global leader in product digitization and has provided anti-counterfeiting solutions, including those protecting many of the world’s most important currencies, for more than 20 years.

Digimarc’s digital watermarks are currently being tested by a consortium of over 160 global companies as part of the Holy Grail 2.0 project in order to improve plastic packaging recycling rates. Additionally, Digimarc is seeing pipeline traction with its newly launched products and announced a connected packaging partnership with Sealed Air to sell its cloud solutions.

In a time period where we are seeing an increase in insider selling, CEO Riley McCormack, who already owns approximately 20% of Digimarc stock and is the Company’s largest shareholder, is particularly bullish on the Company and recently bought 30,000 shares in March at an average price of approximately $25 per share.

From mid-to-late September 2021 DMRC’s Squeeze Score trended in the 90-100 range. From 09/28/21 to 11/12/21 we saw a short squeeze occur with shares shorted declining by 13% as DMRC’s stock price jumped +42%. If DMRC’s stock price resumes the upward trend we saw in late July and early August 2022, we should see its short side squeezability increase.

If the short squeeze re-emerges, the resulting short covering will buoy its stock price alongside long buying. A return to the price levels we saw after Digimarc’s November 2021 short squeeze, when Digimarc’s shares traded in the $50’s, would be a more than 200% return from current levels. An indication of future buy-side pressure in Digimarc is the recent call option activity we saw in the stock. There were 156 call options traded art strike prices below $25 but 3,325 call options traded with strike prices of $25, $30 & $35. The vast majority of those call options, 3,004 @ $35 strike, looking for over a +113% return from Digimarc’s current stock price by December.

We expect that the conversion of Digimarc’s sales pipeline as discussed in the recent earnings call along with new customer announcements should serve as a catalyst for a potential short squeeze resulting in more aggressive short covering.