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The SOS Stock Short Squeeze: Is It the Next GameStop?

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Apr. 7 2021, Published 8:47 a.m. ET

SOS Limited (SOS), a tech company that focuses on emergency rescue services, has expanded its strategy to focus on cryptocurrency mining. The stock is on many investors' radar both because of its rise in short interest and fraud allegations. Why is SOS stock rising, and should you buy it now?

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SOS stock has drawn interest from investors seeking exposure to bitcoin mining stocks or alternatives to Riot Blockchain (RIOT), Marathon Digital (MARA), Hut 8 Mining (HUTMF), and Bitfarms (BFARF). 

Why is SOS stock rising?

On Apr. 6, SOS stock fell 6 percent to $4.50 but then jumped more than 30 percent in extended hours to $5.90. Many other crypto mining stocks fell that day, with RIOT, MARA, and HUTMF falling 5, 7.3, and 7.4 percent, respectively.

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SOS stock has dropped from its peak.

SOS stock's rise may be due to a Reddit campaign seeking to turn it into the next GameStop (GME). Reddit investors have noted that the stock's short interest had risen, and they plan to run a short squeeze over the next few days to drive the stock above $15. Their GameStop squeeze boosted the stock more than 2,000 percent and won many retail investors huge gains. 

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SOS's fraud allegations

In Feb. 2021, Hindenburg Research published a report alleging that SOS Limited was a fraud, indicating that the company was using a fake corporate address. Hindenburg went on to reveal a short position in SOS stock. 

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The fraud allegations sparked a rush to sell SOS stock, causing it to plunge. Hindenburg is the same investor that alleged fraud in Tesla competitor Nikola, prompting its founder and chairman Trevor Milton to step down and GM to scale down its partnership with the company

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Hindenburg has also alleged that SPAC king Chamath Palihapitiya misled investors in the Clover Health (CLOV) deal, claiming that Clover never disclosed its insider dealings and regulatory probes into its practices. CLOV stock tumbled on the allegations.

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Is SOS stock overvalued?

SOS Limited has denied Hindenburg’s fraud claims, but that hasn’t helped its stock—it's more than 70 percent below its recent peak. Furthermore, it's overvalued, at a price-to-book multiple of 15.5. That’s higher than Riot’s 11.7 and Marathon’s 13.8. 

Is SOS a good bitcoin mining stock?

Before it pivoted to crypto mining, China-based SOS was in the online lending business, with a model similar to LendingClub's. The company's data analysis services currently contribute the bulk of its revenue. 

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At $4.50, SOS stock costs less than Riot at $54 and Marathon at $52. However, Riot and Marathon have more advanced crypto mining operations than SOS, and SOS may initially need to rely on secondhand machines. 

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Should you buy SOS stock now?

Although SOS Limited should benefit from the rising crypto prices, it doesn’t look to be a good investment right now. Its old mining machines will make it difficult to compete with the likes of Riot and Marathon, and the stock seems overvalued. Furthermore, Hindenburg's fraud allegations are serious and could result in class-action lawsuits that pose a major investing risk.

SOS stock may look tempting to bargain hunters, but the company has continued to record losses despite its cash needs rising with its expansion into bitcoin mining. It recently raised $125 million by selling new shares, making the risk of continued stock dilution look high. Therefore, SOS stock is best to avoid right now. 

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