Shares of headphone maker Koss (NASDAQ:KOSS) have skyrocketed in the past month, gaining more than 300%. It was another investment that went heavily shorted due to the Reddit-induced short squeeze. In late January, KOSS stock rose from $3.35 to $126 in just five days. However, since then it has come crashing down, shedding more than 70% of its value.
The company has been around for the past 40 years but has never had its stock get past the $15 mark. Though its results were much improved in its latest quarter, it hardly justifies its massive ascent.
Koss has been micro-cap stock for much of its history, its valuation languishing below $300 million. Its 5-year net income margin is at a deplorable negative 2.6%. It lags behind its sector in terms of profitability but dwarfs them across most price metrics. Therefore, it’s nothing more than a short play, but I doubt whether that notion is valid with the SEC investigating the recent short squeeze.
Koss recently reported its second-quarter results for fiscal 2021, which surprised many in the industry. The company had been struggling to grow its revenues well before the pandemic swept away the world’s economy. However, in its second quarter, the company managed to post an 18.4% year-over-year growth in revenues to $4.93 million.
Additionally, its net income was at roughly $509,000 in comparison to a net loss of $216,000 in the prior-year period. It would’ve posted a loss but was helped by a $506,700 Paycheck Protection Program (PPP) loan, let-off, and recorded as other income.
The management attributes the improved results to the pandemic, which compelled many to purchase more electronics. CEO Michael Koss states that “We continue to see sales driven by the continuation of people studying and working from home”. Moreover, the increase in sales has been across several markets, with the U.S. and European markets leading the way. However, with sales being driven by the pandemic, it is natural to expect that this momentum will fade away quickly.
Tighter Regulatory Environment
In the Reddit/GameStop fiasco aftermath, the SEC has announced an investigation to assess the situation. It will be working with other regulators to review the activities of various market participants, financial intermediaries, and other entities. Additionally, it is scouring posts on social media to look for evidence of fraud, which could’ve triggered the stock price manipulation.
Further, trading platforms such as Robinhood and TD Ameritrade halted trading on GameStop (NYSE:GME) and other shorted stocks. They have also placed restrictions on specific types of trading activities.
The apparent consequence of these investigations is more regulation of such stock market activity. The SEC could perhaps introduce greater regulation on margin trading or freeze trading in a middle of an unexplained rally. The result is that it leaves little wiggle room for stocks such as Koss, which could’ve resurfaced through these unexpected events. Therefore, Koss’s investors are likely to post massive losses if they continue to hold the stock at its current levels.
Final Word on KOSS Stock
KOSS stock has been irrelevant for a while now but was brought back to life by the recent short squeeze. Though, its recent results came in significantly better than analyst expectations. However, its earnings were boosted by a PPP loan that would have otherwise resulted in a massive loss.
Its price cannot be justified at the time, and with greater regulations on inexplicable trading activity, KOSS stock might not even be a great short option either.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.