- Mullen Automotive (MULN) has held onto most of its recent meme rally gains.
- Even if a recent “short report” is overblown, there’s something that could knock shares substantially lower.
- This negative will outweigh what remains of “meme stock mania,” and the shorts will likely prevail.
Source: Ringo Chiu / Shutterstock
Even as it has pulled back in recent weeks, Mullen Automotive (NASDAQ:MULN) has held onto much of its recent meme gains. As you may recall, MULN stock, after tumbling from over $15 per share, to under $1 per share, experienced a dramatic run-up in price during February and March.
But while many speculators have dived into this electric vehicle (EV) play, you may want to think twice before buying it in the hopes that it’s a “meme stock legend” in the making. Yes, the short-side has piled into it. However, the more cynical “smart money” may be on the money when it comes to betting against this company. Even if recent claims from a vocal short-seller are overblown.
Add in the fact that the meme trend is nowhere near as powerful as it was in 2021, and it’s wise to assume shares aren’t going “to the moon” from here.
MULN Stock and the Bear Case
Admittedly, besides the short-squeeze angle, you can build a bull case for Mullen Automotive based on factors besides its high short-interest number (15.92% of float, according to Fintel).
Like I discussed back in March, it wasn’t just its “squeeze appeal” that sent MULN stock soaring. Buzz around the company’s efforts to develop a solid-state polymer EV battery played a big role in its price spike as well. Bringing such a product to market would be a game-changer. On the other hand, this may be a situation where if it sounds too good to be true, it probably is.
At least, that’s the gist of Hindenburg Research’s much-discussed “short report” on Mullen. The activist short-selling firm (which holds a short position in the stock) alleges that the company misrepresented its battery test results. Along with this, Hindenburg makes other allegations. All together, its argument is that this early-stage EV company is more likely to be the next Nikola (NASDAQ:NKLA) or Lordstown (NASDAQ:RIDE) rather than the next Tesla (NASDAQ:TSLA) or Lucid (NASDAQ:LCID).
So far, Mullen stock has seen minimal impact from this news. Shares have moved only slightly lower since the report dropped on April 6.
Capital Raise May Signal Future Declines
Why hasn’t the short-report knocked MULN stock substantially lower? A reason for this may be the fact that one individual quoted in the report, Tom Gage, CEO of the company that tested the company’s batteries (EV Grid), claims Hindenburg misquoted him.
Also, Gage clarified that he believes Mullen did not misrepresent the battery test results. There now may be hope that the Hindenburg report is wrong in insinuating its on the verge of collapse. However, collapse or no collapse, shares could still take a tumble from here.
Even if its vehicle, and its solid-state battery, are the real deal, it’s still going to take a lot of cash to turn its plans into a salable product. As recently as Dec. 31, this company had just $360 in unrestricted cash. That’s why Mullen has been in capital raise mode since the start of 2022. Management reported it expected to have a $65 million cash position as of March 31.
This may prove to be the case, but at what cost? That is, the company is raising this money using a very dilutive method.
The Shorts Will Likely Prevail
As my InvestorPlace colleague Mark Hake discussed last month, equity lines of credit have been Mullen’s financing option of choice. In a nutshell, hedge funds buy convertible securities that can be exchanged for common stock. These deals are a win for management. It gets cash to keep the lights on. They’re a win for the hedge funds. The deal is typically structured to enable the fund to cash out at a profit. But for regular shareholders?
It’s usually a big loss. Their piece of the pie gets seriously diluted. Chances are it will continue raising money this way. It’s going to need more than $65 million to bring its flagship vehicle, the Mullen Five, to market. Like with other companies that utilize this financing method, resultant dilution will push the stock lower.
How about the short-squeeze angle? With the waning popularity of squeeze plays, just because it’s still trending on Reddit doesn’t mean a squeeze is in store. Especially as free float goes up over time, due to the equity lines of credit.
As the shorts, not the meme crowd, are the likely victors here, it’s best to stay away from MULN stock.
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On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.