Stock Market

Newegg Stock Is Still Overvalued Despite Falling 60% YTD

Risky growth plays are feeling the pressure of rising inflation and increasing interest rates. Under these circumstances, Newegg’s (NASDAQ:NEGG) stock is not for the faint of heart since it’s a true meme stock in every sense.

Newegg is an online retail company selling various computers, electronics, and more products. The main reason why the company came to the limelight last year was because of the frenzy surrounding Reddit stocks. It emerged as one of the most talked-about stocks on r/wallstreetbets, and the rest, as they say, is history.

After a reverse merger that established the current enterprise, the stock price jumped to $70 a share in less than a week but fell nearly 40% by the end of July. These kinds of price movements are not uncommon. Retail traders undoubtedly had a field day.

Since the short ratio is high, the company might be a prospect for a short squeeze down the line. However, we do not have financials.

Analysts are concerned more data won’t be available later on since sentiment hasn’t. So, although opinion should improve and could potentially help shares rebound, there’s a risk of further disruption without it too. There is no auditing of the company’s financial confidence. This can make it hard for investors to see their company’s claims.

Hence, the only reason why investors might be interested in the company is as a potential momentum play. If the short interest keeps increasing, Redditors could become interested again. However, if it’s business as usual, then the chances of a spike are negligible. On balance, there are not many reasons to invest in this one.

NEGG Is a Better Meme Stock Than Most

Newegg’s success in 2021 is attributable to the larger Reddit frenzy and SPAC momentum. Both of these forces combined to induce huge spikes for Newegg Commerce.

The electronics and computer hardware e-tailer did not need to do anything major. Redditors did the bulk of the heavy lifting, which is why the current reality is sobering. Newegg is often a ‘meme stock’ where short-term traders with little appreciation of what they’re investing in push the price up & down, but at the end of the day, there’s an undercurrent understanding that Newegg is a solid business.

Net sales increased 39.9% in the first half of 2021, and net income jumped 14%. For the entire year, Newegg recorded revenues of $2.38 billion and $46.31 million in EBITDA. Much like other major e-commerce stocks, it is no surprise that the company did well during the height of the pandemic.

Newegg delivered on many fronts, such as through its retail offerings. One of the hits was NVIDIA’s (NASDAQ:NVDA) GeForce RTX 30 Series GPU, a sought-after card among gamers and cryptocurrency miners.

Therefore, Newegg has a good business model. It sells computer parts, PCs, and more to 4.7 million customers. Newegg has a wide network of Chinese suppliers to compete effectively with Amazon (NASDAQ:AMZN).

The company was a prime candidate for social media interest. With a SPAC listing, e-commerce focus, and an expansive product portfolio, it was inevitable that they would attract attention on all fronts.

Newegg is a good company, but its stock price is still much higher than it should be. It is still trading at 51.88x price to earnings. In comparison, Alibaba (NYSE:BABA) is trading at 31.26x.

Things Are About to Get Tough

Reddit traders promptly bought Newegg shares in anticipation of a rise in the company’s value. The effort by the community to increase prices couldn’t last long because the total capital base was not that big. So, a short squeeze needs to happen for momentum to stay high.

It is not out of the question since the short ratio is 18%. But nothing in the company’s fundamentals suggests a huge uptick could be in the offing. Under these circumstances, NEGG stock is not a buy.

On the publication date, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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