Cyren: A Short Squeeze Could Present Short-Selling Opportunities
Over the past year, I’ve written bearish SA articles on more than 30 companies that seem to have attracted significant retail investor interest. The share prices of the vast majority of them have declined as of the time of writing as retail investor interest is often fleeting and the fundamentals just aren’t there in most cases.
Today, I’m taking a look at cybersecurity firm Cyren (NASDAQ:CYRN) whose market valuation has increased fivefold between February 25 and March 8 after it regained compliance with the Nasdaq listing rule for maintaining a minimum closing bid price of above $1.00 per share for the prior 10 consecutive business days.
Cyren is the top trending nano stock on Fintwit as of the time of writing and I think there could be a short squeeze going on. Short squeezes rarely last more than several days and there could be a good short selling opportunity if the short borrow fee rate declines to double-digit levels or put options become available. Let’s review.
Overview of the business and financials
Cyren was established in 1991 and it specializes in the provision of cloud internet security solutions, including security-as-a-service for email, sandboxing, and DNS, and embedded threat intelligence solutions for security vendors and service providers. The company claims that more than 1.3 billion users worldwide use its cloud solutions and that its clients include Google, Microsoft (NASDAQ:MSFT), and Check Point (NASDAQ:CHKP).
According to Cyren’s Q3 earnings call, the company’s objective is to build a new recurring revenue stream in the enterprise anti-phishing market. This will come through it Cyren Inbox Security product, which is aimed at protecting Office 365 users against sophisticated phishing threats, and in my view, the growth seems promising at the moment. In Q3 2021, customer transactions rose by 36% and annual recurring revenue growth stood at 92%. However, overall revenues declined during the quarter due to the churn and down sales of the company’s legacy business from previous quarters. With sales and marketing, and general and administrative expenses remaining almost unchanged compared to Q3 2020, Cyren is far from becoming profitable.
And looking at the revenue breakdown by segment, the enterprise business is still very small.
Turning our attention to the balance sheet, I think things didn’t look good at the end of September as Cyren had $8.54 million in convertible debentures and another $10 million in convertible notes. Other red flags included negative working capital as well as shareholders’ equity that was lower than intangible assets plus goodwill.
In light of this, I think it’s unsurprising that the share price slumped below $1 in 2021, raising fears that Cyren could be delisted. So, how did the company deal with the situation? Well, it used $10.2 million raised through a capital increase in September to repay its convertible notes, thus decreasing its debt burden to $9 million. On February 8, Cyren announced a 1-for-20 reverse split of its ordinary shares, thus paving the way to regaining compliance with the Nasdaq listing rule for maintaining a minimum closing bid price of above $1.00 per share for the prior 10 consecutive business days. The official announcement about regaining compliance came on February 25 and this is when the share price started soaring. The trading volume has been high too, with over 53 million shares changing hands on February 25 alone.
My theory is that this is happening as a result of high retail investor interest. As I mentioned, Cyren is the top trending nano stock on Fintwit as of the time of writing.
There are also a large number of posts about the company on websites like Twitter, and StockTwits. On YouTube, Cyren is being covered by several channels, including ClayTrader, Lumley Trading, TurboTrading Corp, Cyber Trading University, red2green, StarTrader, and STEVE-O STOCKS. Note that the company isn’t doing the promotion of its business or shares itself, but this is being done by a significant number of private investors and traders.
Some retail investors say that the share price of Cyren is soaring because there is a short squeeze going on. I think it’s possible considering the trading volume has been regularly surpassing 4 million shares over the past several days and that data from Finviz shows that the short float is 7.48%. Also, data from Fintel shows that there are only 5,000 shares available for borrowing as of the time of writing and that the short borrow fee rate is 417.22%.
Shorts squeezes usually don’t last long and in my view, it’s worth keeping an eye on Cyren. The two most famous short squeeze cases in history include GameStop (NYSE:GME) and Volkswagen (OTCPK:VLKAF). GameStop’s January 2021 short squeeze lasted just around two weeks and ended just as mainstream media picked up the story. In 2008, a short squeeze made Volkswagen the most valuable listed company in the world with a market capitalization of €300 billion before it all ended in just a week.
Cyren is trying to turn around its business, but I think that its financial results look underwhelming at the moment and that it could need another capital increase in the near future to finance its operations.
The company’s valuation has been soaring over the past two weeks and I think the reason for this could be high retail investor interest that led to a short squeeze. These situations rarely last long so it could be a good idea to sell short Cyren shares even at a short borrow fee rate of above 400%. This is risky though and a better approach could be to wait for put options to become available or for short borrow fee rates to decline to more reasonable levels.
For risk-averse investors, I think it could be best to avoid Cyren as I perceive this as a high risk, high reward type of opportunity.
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