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Newegg Stock: A Different Kind Of Short Squeeze

Shares of online retailer Newegg spiked by almost 150% on Wednesday, July 7. However, the recent short squeeze could be different from those of AMC and GME. Wall Street Memes takes a closer look.

Some context first

In October 2020, online retailer Newegg (NEGG) - Get NEWEGG COMMERCE, INC. Report went public through its merger with Lianlou Smart (LITT) via SPAC. The company's core business is the sale of computer hardware and consumer electronics.

Valued at $22 billion on July 7, the company was originally founded in 2001 by Taiwan native Fred Chang, and currently has more than 1,500 employees. 95% of outstanding shares belong to the company's two main shareholders: Zhitao He with 60% of outstanding shares and Fred Chang with 35%.

Figure 1: Newegg HQ in City Of Industry, CA.

Figure 1: Newegg HQ in City Of Industry, CA.

(Read more from Wall Street Memes: GME Stock: Can It Still Play The Meme Game?)

Fundamentals off the table

The company, operating in a promising market, has been delivering solid revenue growth while staying profitable last year. In the last quarter of December, the company posted sales of $626 million, an increase of 70% YoY, and net income of $5.7 million.

However, these numbers might not be enough to justify an equity valuation of $22 billion. NEGG stock’s price-earning (P/E) ratio is currently 138 times vs. an average of 32 times for the US online retail industry. See figure below.

Figure 2: NEGG P/E ratio compared to industry and US market.

Figure 2: NEGG P/E ratio compared to industry and US market.

On July 7, NEGG had a short interest volume of 36%. The massive bullish force responsible for the recent spike in the stock price was the consequence of a short squeeze. Once again, business fundamentals were unlikely a factor in recent share price action.

(Read more from Wall Street Memes: AMC Stock Price Crumbles: What To Do Next)

Recent buzz

What may have caught the attention of retail investors this time were the four hard-to-find NVIDIA graphics card models that were available for sale by Newegg. These components are in high demand by gamers and cryptocurrency miners. NEGG quickly became a heavily commented ticker on the Reddit forums, albeit less than other better known meme stocks.

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Jim Cramer: a BGL play

According to Jim Cramer, Newegg's is a different case of short squeeze compared to other meme stocks, like AMC and GME. According to him, this was a case of BGL play: bag ‘em, game ‘em and liquidate ‘em.

In this case, investors who overbid NEGG may have caused the short squeeze and closed their positions shortly after execution. In the cases of AMC and GME, the apes have been favoring a buy and "hodl" approach instead.

According to the Mad Money host, meme traders could be struggling to support another leg up in GME and AMC. Therefore, they could be pushing new stocks like Newegg and quickly locking in the profits, allowing them to hold the positions in the two better-known meme stocks.

Twitter speaks

Newegg stock is the latest case of massive short squeeze. However, meme mania did not follow through on July 8. Do you believe that the stock has further upside, or was this an isolated case?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)