What happened
Shares of esports company FaZe Holdings (FAZE) were soaring in early trading on Tuesday, with exceedingly high trading volume. As of 11 a.m. ET, more than 11 million shares had traded hands, according to Yahoo! Finance, compared to a three-month average of 1 million shares in daily trading volume. FaZe stock was consequently up 19%.
So what
In a nutshell, stocks go up when there are more buyers than sellers. Over the long term, investors tend to buy and hold stocks as their earnings go up, which is why I advocate for investors to focus on business fundamentals. But over short periods of time, traders can be motivated by other factors, and that's what's going on with FaZe stock today.
FaZe generates revenue by monetizing its large esports fan base in a variety of ways, including merchandise and advertising. However, many believe this is a bad business and have shorted the stock, poised to make money if it goes down. According to official data from Nasdaq, nearly 1.4 million shares of FaZe stock were sold short as of Aug. 15.
Interestingly enough, relatively few shares of FaZe are available for trading -- it has a low float. And according to Fintel, there aren't any more shares available to short. This means that the cost to short FaZe stock is very high. Traders are betting that this high borrow fee will compel shorts to cover their positions -- those shorting now will become buyers. And if these buyers suddenly pour into the stock, FaZe's low float will create a powerful short squeeze, just like what has occurred with GameStop stock in the past.
Now what
In my opinion, if this situation creates upside opportunity in FaZe stock, it'll be temporary. Consider that this business officially came public via a special-purpose acquisition company (SPAC) on July 20 and this event starts a process that brings more shares to the market as part of the float. In other words, right now FaZe looks like a good short-squeeze candidate. But with nearly 73 million shares outstanding as of Aug. 12, a relatively few amount of total shares are sold short, diminishing the potential catalyst from shorts covering their positions.
For a specific example, there are 862,500 founder shares of FaZe stock that could be sold if the price per share is over $20 for 20 out of 30 trading days. For perspective, it trades right at $20 per share as of this writing. And these unlocked shares could cover more than half of the current shares sold short if these SPAC founders chose to sell.
The point here is not to say that FaZe stock can't be short-squeezed -- it can. The point is that long-term investors need to exercise caution, realizing that current catalysts to the upside likely have an expiration date.
