Cepton: Short Squeezes Provide Interesting Short Selling Opportunities

Summary

• The company recently listed on NASDAQ through a SPAC deal and redemptions were around 90%.
• It seems that retail investors have realized the public float is low and there appears there was a short squeeze on February 17 when the share price hit $80.16.
• I think we could see more short squeezes in the near future, which could create good short selling scenarios.
• Historically, short squeezes rarely last more than a couple of days and if that happens again with Cepton stock, the share price is likely to fall back to around $10-$12 per share once more.

Liudmila Chernetska/iStock via Getty Images

Investment thesis

Lately, I've been looking at companies that recently listed through a purpose acquisition company (SPAC) deal and had high rates of redemptions. In my view, such companies are likely to find it difficult to fund their growth in the near future and could be forced to tap the equity markets, leading to significant stock dilution if the share price is low at that moment. In my view, this creates interesting short-selling opportunities, and today I'll be talking about one such company named Cepton (NASDAQ:NASDAQ:CPTN). It's a light detection and ranging (lidar) solutions provider that was listed on February 11 following a merger with a SPAC named Growth Capital Acquisition Corp. The holders of more than 90% of Growth Capital's shares asked to trade them in for cash and it seems there was a short squeeze on February 17. Let's review.

Overview of the business and financials

Cepton was founded in 2016 and it specializes in lidar solutions for automotive, smart cities, smart spaces, and smart industrial applications. Its core offering includes patented micro motion technology (MMT)-based lidars and the company has a presence across the USA, Germany, Canada, Japan, and India. In July 2021, Cepton announced that it secured the largest known advanced driver assist systems (ADAS) lidar series production award in the automotive industry to date, based on the number of vehicle models awarded. Production is expected to start in 2023.

Cepton

Cepton has over 100 clients and is currently actively engaged with all of the top 10 original equipment manufacturers (OEMs) in the auto space. It has a partnership with the world's largest automotive exterior lighting Tier 1 supplier Koito Manufacturing (OTCPK:KOTMY), which led its $50 million Series C funding round in early 2020.

Looking at the key markets, ADAS provides the best opportunity by far with the total addressable market (TAM) growing to around $50 billion by 2030.

Cepton

Looking at the financial projections, Cepton expects to grow revenues to $1.22 billion by 2022 and achieve free cash flow breakeven by 2024. The long-term objective is to reach an adjusted EBITDA margin of over 40%.

Cepton

These financial goals appear ambitious, but I think that they are achievable considering the company's high visibility potential revenue. The company defines the latter as automotive awarded + automotive advanced engagement and smart infrastructure production partners + smart infrastructure advanced engagement.

Cepton

So what's not to like about Cepton? The products look well, the company has a large contract with General Motors (NYSE:GM), it has partnered with the world's largest auto lighting supplier, and there's high visibility in regard to revenue. Well, in my view the main issue is funding. Looking at the structure of the SPAC deal, Cepton was supposed to have up to $192 million in cash with which to fuel its growth.

Cepton

However, redemptions removed $155.9 million from the SPAC's trust or about 90% of the $172.5 million Growth Capital was holding. This means that Cepton needs to rely mainly on the $59.5 million of private investment in public equity (PIPE) to fund its growth. I think the amount of the redemptions is not surprising considering that the average redemption rate from SPAC deals soared to 75% in January 2022 from 14% a year earlier, according to data from Boardroom Alpha.

The high rate of redemptions led to an interesting development for Cepton as the stock soared to $80.16 on February 17. The company's shares are trading at $12.10 as of the time of writing and I think that the spike was caused by high retail investor interest. You see, these redemptions figures mean that the public float is low and this has led to a significant number of posts on websites like Twitter (NYSE:TWTR), StockTwits, and Reddit discussing a short squeeze.

Seeking Alpha

Was there really a short squeeze on February 17? I think it's possible as data from Fintel shows that the short interest stood at 350,069 shares as of February 15, which translates into 2.29 days to cover. I view it as likely that we could see more short squeezes in the future unless some of the shareholders of Cepton start trimming their stakes and thus increase the free float.

Long term, I think that the company could need to carry out a capital increase in order to fund its operations as it's around two years away from achieving free cash flow breakeven. If the share price is low at that point, this could lead to significant stock dilution and this is why I don't want to take a long position at this moment.

Investor takeaway

I view Cepton as an innovative supplier of MMT-based lidars that could become a leader in the ADAS market in a few years. There's a lot to like about the company but the lackluster listing means that it's likely to need fresh funds before 2024, which creates stock dilution risks.

It seems that the small public float has attracted a significant amount of interest from retail investors, who seem to be betting on a short-squeeze. I think they managed to cause one on February 17 and it's possible that more could follow. In light of this, I think it could be a viable idea to keep your eyes open for another one and sell short the shares until they fall back to around $10-$12 per share. Historically, short squeezes rarely last more than a couple of days. According to data from Fintel, the short borrow fee rate stands at 31.46% as of the time of writing.

For risk-averse investors, I think it could be best to avoid Cepton for now and revisit the company once it secures more funding for its business.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.