Published , by Asif Khan
Published , by Asif Khan
FaZe clan has been a publicly traded stock since their July 2022 SPAC deal, and I have steered clear of the company. It is not that compelling of an investment from a bottom-up fundamental analysis approach. FAZE shares are currently trading at nearly 3,000 times their earnings expectations, and the company's profit margins are very low. In fact, this stock appeared in several stock screens I have run looking for short opportunities. With all this negative data backing my short thesis, I was ready to initiate a bearish bet on the company's stock, that was until I saw just how absurd of an idea that would be.
When I logged into Etrade's trading platform this morning, I was not surprised to see FAZE stock is listed as "hard-to-borrow," but I was shocked to see that the Estimated Borrow Rate at Etrade is 800%. That means a short trade would still lose 700% if FAZE went bankrupt in a year. This is perhaps the worst risk-reward I have ever witnessed on a short trade, so I went on to investigate if a put options position might be a better way to go to express a bearish opinion.
Now I could have easily just moved along from this stock and kept my money in my pocket, but that insanely high estimated borrow interest rate combined with options that don't offer compelling risk-reward setups has led me to ignore many fundamental red flags and go long FAZE. For example, the $5 strike put option expiring on January 17, 2025 is currently trading near $3, which means there is only 66% upside on that bearish option bet if the stock goes to zero. Traders would also be paying a hefty premium for long-dated put options with implied volatility currently registering at over 120%.
I initiated a long position in FAZE today because it is damn near impossible to make money short the company right now. My actions today are a break from my core fundamental approach to investing, but it is hard to ignore the very unique trade setup that is taking place here. FAZE is an expensive stock, but there appear to be some structural issues with the availability of shares. Yahoo Finance reports the float is only 162,350 shares while there are 72.51 million shares outstanding. Other websites report higher amounts of shares as the float, which really makes the picture even murkier. With a very large 47% insider ownership, and institutional ownership at 33.23%, it truly seems like there are not many shares to go around.
One concern that I have with this new position is that it is entirely possible that FAZE could issue more shares in secondary offering to alleviate the scarcity of shares, but that may occur at a higher price down the road. It does seem crazy for a company with $62.2 million in revenues to trade for $1 billion, but it is possible things could get more absurd going forward.
With options premium at elevated levels, and the cost to borrow FAZE at an absurd 800%, it really seems like betting against the company is damn near impossible for the time being. Only time will tell if the direction for the stock will be FAZE up before the constraints alleviate or if this will ultimately be another SPAC deal that ends in tears for shareholders.
This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.
Full Disclosure:
At the time of this article, Shacknews primary shareholder Asif A. Khan, his family members, or his company Virtue LLC had the following positions:
Long FaZe Holdings via FAZE shares
Long FaZe Holdings via FAZE call options