A short squeeze can instantly send a stock rallying. It can happen when a risky stock that short sellers have been betting against generates promising results, leading to a rally. Then, short sellers may panic to cover their short positions, which could fuel the rally even further. That kind of momentum can quickly make a stock take off.
Plug Power (PLUG 4.01%) has been a heavily shorted stock, and it recently posted better-than-expected earnings. Could this inevitably lead to a short squeeze, and is now an opportune time to buy this struggling hydrogen stock?
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Plug Power shrinks losses and beats revenue expectations in Q1
Last week, Plug Power posted some encouraging quarterly numbers, with its sales for the first three months of the year rising by 22%. At $163.5 million, the top line came in well above the $140 million analysts were expecting. And on the bottom line, its operating loss of $109 million was also a shade better than Wall Street's estimate of $110 million. It was a big improvement from its $178 million operating loss in the same period last year.
Its electrolyzer business has been doing well, but despite the promising growth, Plug Power still burns a considerable amount of cash. During the quarter, it used up more than $150 million just to fund its day-to-day operating activities. The danger for investors is that with a rapid pace of cash burn, the risk for frequent stock offerings and dilution remains high.
NASDAQ: PLUG
Key Data Points
The stock has been surging in recent months
In just three months, shares of Plug Power have risen around 90%. However, there hasn't been a sudden surge of bullishness following its latest results, suggesting that the recent earnings numbers, while promising, may not be enough of a reason to send a panic through short sellers. This is, after all, a stock that is still down a whopping 86% in five years. The recent rally in the share price may have put a dent in short sellers' profits, but people betting against the stock may still be sitting on some large gains.
Plug Power's stock may not be heading for a short squeeze. The reality is that there are still huge question marks around the business and its long-term future, which is why short interest remains high. Until the company puts to rest concerns around its high rate of cash burn, this is going to be a highly risky and potentially volatile stock to own. The safest option for investors is to take a wait-and-see approach with Plug Power stock.
