The meme stocks phenomenon may be resurfacing again, at least for electric vehicle manufacturer Faraday Future (NASDAQ:FFIE), which has seen its shares pop nearly 60% on Tuesday. While no real fundamental news emerged, trading dynamics suggest that speculators are hoping for a short squeeze on FFIE stock.
To quickly recap, a short squeeze is an attempt to force bearish traders out of their positions. Traders wishing to short a particular security must first borrow the underlying shares to sell them. Should the stock fall down in price, the bears can then pick up the securities in question, return them to the lender and pocket the difference.
However, lenders are owed their shares no matter what. Therefore, higher underlying prices may force bears to capitulate, with the subsequent purchasing action driving up the price to fresh plateaus. According to data from Yahoo Finance, the short percentage of float for FFIE stock (as of June 15, 2022) was 20.4%.
Though no hard rules define what is a worrying short percentage of float, analysts consider anything above 20% as very high. Further, the short ratio of FFIE stock – or the days needed to cover the bearish position – is 7.04, which, while not alarming, is a source of concern for Faraday bears.
FFIE Stock and the Pitch to the Rich
With the dramatic swing higher in Faraday’s market value, FFIE stock is now one of the best-performing pure-play EV investments. As of this writing, FFIE is down slightly on a year-to-date basis. In comparison, sector leader Tesla (NASDAQ:TSLA) and upstart rival Lucid Group (NASDAQ:LCID) are down 33% and 55% over the same period, respectively.
Whether FFIE stock can maintain this incredible momentum is an open question. While EVs may be the future, the average transaction price for a new electric-powered car is now over $60,000. With the U.S. median household income currently around $70,000, EVs are not realistically available for the masses. Therefore, Faraday’s focus on premium rides (though it intends to eventually produce a mass-market vehicle) makes the most sense.
However, what will likely raise eyebrows is the price of the company’s flagship model, FF91. A Barron’s report from July 2021 indicated that the FF91 – which can rocket from zero to 60 miles per hour in about 2.6 seconds – will retail for around $180,000.
That’s a staggering amount of money. Other reports suggest that early releases of the FF91 will cost around $300,000. Flying right into supercar territory seems a risky proposition for FFIE stock.
Fingers Crossed for Faraday
To be fair, Reuters reported in mid-June of this year that Faraday will be able to launch its flagship vehicle without the need for additional funding. Further, management stated that it would “start delivery of its FF91 car in the third quarter this year and expects to make between 6,000 and 8,000 cars in 2023.”
Still, those wagering on FFIE stock for reasons beyond the short squeeze will face a tough market environment. First, the competition in the EV sector is intense. Second, social developments post-pandemic (such as working from home) impose headwinds on car manufacturers, electric or otherwise. Finally, if an economic downturn materializes, the total addressable market could be significantly diminished.
In other words, caveat emptor.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.