In my last article on Mullen Automotive (NASDAQ:MULN), I argued why the short-side was right on the money in its bearishness. Since then, short-sellers have not only been on the money. They’re in the money as well, when it comes to MULN stock. In a week’s time, it’s dropped around 40%.
This plunge has happened, despite recent updates on its EV battery development efforts. For instance, on April 18, when Mullen announced its plans to begin construction of battery packs for its lineup of EVs. Also, on April 21, it announced plans to conduct tests on its solid-state polymer battery cell. The company has claimed its battery technology will enable its vehicles to get over 600 miles of range on a full charge.
Why is this happening? Perhaps the meme crowd has wised up. Since late 2021, since “meme stock mania” began to fade, they’ve been burned many times. Reddit traders have chased many penny stocks that have deflated in price, instead of making a true “to the moon” move.
Looking beyond the headlines, perhaps they’ve paid more attention to the key red flags that surround MULN stock. For starters, the allegations that the company has misrepresented the results of its past battery testing, an allegation made by Hindenburg Research in its highly-publicized “short report.”
Whether or not these allegations prove true, the second red flag could sink it anyway. I’m talking about the heavy amounts of dilutive capital raising Mullen has engaged in over the past few months. Not only is issuing more stock “slicing the pie” into many more slices (i.e. minimizing upside potential).
These newly-issued shares will in time find their way into the public market. The hedge funds that have bought them (via equity lines of credit deals) are champing at the bit to sell. A profit is all-but-guaranteed for them, based on the structure of these deals.
Chances are high that it continues resorting to this damaging form of financing. Despite its recent capital raises, Mullen remains undercapitalized. In turn, despite the fact it’s already dropped considerably, it could see additional big declines. If it drops below the $1 per share mark, it may end up having to reverse-split. A reverse-split could result in more downward pressure from the short side.
In avoiding shares, despite the glowing press releases about its EV battery technology, it’s the meme crowd has seemingly wised up. With this in mind, you may want to wise up as well, and steer clear of MULN stock.
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.
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