I have been closely monitoring the short selling activity in NXT...

I have been closely monitoring the short selling activity in NXT for some time – and the short seller(s) have steadily ramped up their short position in NXT from about 5% on 19th March to its current level of over 10.1% of stock on issue (just under 20m shares). 144edward is spot on – this is a very large exposure for a stock of moderate but not high liquidity, and I suspect they are belatedly realising just how exposed they are with the large short-position they have built up (hence scrambling for large lines of stock to cover) and steadily reduction in willing sellers at these prices.

It is almost certain they have borrowed their stock to short from the two large super funds HEST Australia & AustralianSuper (who between them own about 14.5% of NXT). They are long-term investors in the company, and hence not fussed about shorter-term stock-price gyrations – so happy to lend their stock out & make a small extra margin on it in the interim.

In my opinion, if a short-squeeze sets in, they can only realistically cover their shorts on market - as they have no real other means of obtaining large lines of stock off-market (of the 4 major shareholders - they have already shorted most of the 2 industry super fund’s shares, 144edward not willing to sell his 9% of stock at anywhere near these levels, and Ryder Capital (sophisticated investment firm for high-net worths) having only recently moved onto the register in mid-late August with 7.3% of company has just got set anticipating untapped value & thus most unlikely to sell now).

I suspect the short-sellers modus operandi in short-selling the stock so heavily was three fold:

1)  Having completed a capital raising in Aug 2013 at $2.60 and a subsequent substantial decline in stock price as the reality sunk in that the ambitious national vision would take time to achieve and involved risk, tax loss selling would likely be substantial leading into 30 June.
2)  The short-sellers ran numbers on NXT’s plans and rightly forecast that NXT would probably need to raise further capital through a discounted issue sometime in late 2014 or early 2015, in order to complete the fitout of their ambitious national data centre rollout & ramp up.   
3)  With the company firmly in ramp-up and fitout mode (i.e. bleeding funds with cap-ex and initially empty centres until revenue catches up) – they punted on being able to make their play in an otherwise pervasive positive-information vacuum. This vacuum is likely exacerbated by the fact that due to strict privacy clauses in whitespace cloud computing customer contracts, NXT probably can’t announce many of its impressive list of national & multinational clients taking space in its data centres.

However with management’s unexpected and shrewd June 2014 unsecured notes offering successfully heading off the need for any further capital raisings, and tax-loss selling subsiding by 30 June, the short-sellers should have realised the game had changed and it was time to lock in profits & cover. However I believe they got greedy, punting on looming equity market weakness to conclude they could push the price even lower & squeeze out further profits. I believe they have badly miscalculated – and they are now in a precarious position, and about to have a nasty dose of their own medicine in reverse.

With good full year results, all IT certifications in place, admission to the federal government suppliers panel complete, and the expensive national rollout & fitout mostly de-risked & nearing completion (only 20-30M capex left FY15 to finish targeted fitout – funded with easily from 70M cash in bank & 20M overdraft line if was required), and positive EBIT cashflow to commence this half – the business is about to transition into a more mature phase of business development which will appeal to a much greater swathe of investors and analysts. With NXT capturing a healthy share of the rapid growth in cloud computing & associated services, NXT’s relatively fixed cost base, and most of its rapidly growing revenue being sticky and recurring in nature - the substantial operating leverage available in NXT's business model should become increasingly apparent & recognised in its beaten-down share price.

With the AGM scheduled for Friday 14th November (http://www.nextdc.com/our-company/investor-centre), at which I am optimistic there could be a further positive trading update & probably confirmation of having reached (or soon to reach) the significant milestone of EBIT-positive cashflow, I suspect the window is fast closing on the short-sellers risky game.

I believe they have overplayed their hand, and are going to have pay up on market to cover their very large short positions. I for one will not shed a tear for them with their predatory practices (usually at the expense of small investors who actually support entrepreneurial enterprise and the creation of something, rather than trying to profit from manipulating prices down & others fear), and will enjoy watching the hopeful turn of the tide.

In fact waiter, ....I’ll have a Short Seller on the Rocks please.