Creatd Stock Is a High-Risk Buy for Investors Amid the Short Squeeze

Short squeezes have become a dreaded word for hedge funds considering the massive losses that many of them have incurred on their short positions in 2021. Creatd (CRTD) is the latest name to join the long list and has spiked recently on a possible short squeeze. What’s the forecast for CRTD stock and should you buy it now?

First, short selling is perfectly legit and helps in effective price discovery. In a long-only market, the price discovery isn't efficient. Investors who are bearish on the stock can’t do much apart from selling the stock if they already own it.

Creatd stock rose over 33 percent on July 12 and was trading higher in early trading on July 13. The company develops tools for creators that help them reach a larger audience. On June 30, the company provided a business update and said that it expects to post revenues of $1 million in the second quarter and between $1.6 billion and $1.8 billion in the third quarter. Creatd also reported 30,000 subscribers for its premium service Vocal+, which launched in 2020.

The company also lowered its marketing budget forecast for the third quarter by around $1.5 million and now expects around $3.3 million in operating expenses in the quarter. Still, the number is over twice the lower end of its revenue guidance.

Commenting on the third-quarter outlook, Creatd CEO Jeremy Frommer said that the company will be “relying less on traditional paid media avenues and leveraging the organic traction of our network of creator communities—currently 39-strong.” He also said, “Coupled with that, our newly-released Vocal Ambassador Program is a powerful source of organic expansion for our platform and one that we anticipate will only continue to gain steam.”

As with a lot of meme stocks, a positive business update by CRTD was further compounded by the high short interest. When the company released its business update, its short interest was over 30 percent. Now, that’s a juicy enough short interest to trigger a squeeze.

Former hedge fund manager Will Meade also commented on the short squeeze in CRTD in one of his tweets. He said that hedge funds are long on major tech stocks in the Nasdaq Index but short on small-cap names like CRTD and Carver Bancorp (CARV). He attributed the rise in small-cap stocks to short-covering by hedge funds.

CRTD is a tiny company. While its stock price has risen above $5, which is the SEC threshold for penny names, its market capitalization is below $100 million. Not many Wall Street analysts cover such tiny names.

The company’s business update was positive. It expects revenues to rise sharply and costs to fall. If the company can achieve an annual revenue run rate of $6 million, which is actually below the annualized third-quarter revenue that it provided, we’ll get a price-to-sales multiple of around 10x.

The multiples don’t look incredibly high for a growth company. The stock could be a buy if you are willing to take the higher risk to chase the returns. However, like all short squeeze driven rallies, it won’t be surprising if CRTD stock also retreats from the highs in the short term. Meanwhile, Jim Cramer thinks that CRTD stock is a pump and dump.