Facedrive Stock: Downside on the Horizon

Facedrive Inc. (TSXV:FD) is one of those rare opportunities for short-sellers in today’s market, but should investors jump into this trade right now?

| More on:

As I mentioned in a recent piece, I think Facedrive (TSXV:FD) is perhaps the best short opportunity in Canada right now. Since this piece was published on Feb. 22, shares are down more than 30% at the time of writing. For short-sellers, that’s a nice quick +30% profit in a couple weeks.

I think this stock has a long way to fall, and this is only the beginning. I’d encourage investors to read my previous piece for more information on why that’s the case.

In this article, I’m going to describe for new investors what short-selling is, and how one can get involved, if they so choose.

How to short-sell a stock

Selling a stock short has been made quite simple these days. Most brokerage firms offer the option of “sell short” in the drop-down menu where “buy” or “sell” are listed.

Short-selling is a strategy used by investors looking to bet against a stock. Essentially, the short-seller borrows the stock they don’t like and sells it at the (hopefully overvalued) market price. The short-seller promises to return the borrowed stock and pays a premium to the lender (owner of the stock). The brokerage firm orchestrating the trade also gets a cut. It’s a win-win-win scenario where all three parties benefit from the transaction.

If the price drops as the short-seller hopes, they buy the stock back at the lower market price at a profit. If the stock goes up, however, such an investor could be saddled with a large loss. This makes short-selling inherently risky and only a strategy that is typically used by sophisticated investors.

When one feels like most of the downside has been captured with a given stock, it’s time to “cover” one’s position. What does this mean? It means an investor will buy back the stock they borrowed at the market price and keep the difference (the hopeful profit).

The risks to short-selling are high, so trade carefully

Unlike buying a stock, which carries a potential loss of 100% (if the stock goes to zero), options carry unlimited risk.

This is because stocks can theoretically go up to infinity, so the potential losses for the short-seller are infinite. As mentioned, short-selling is typically used by sophisticated investors with very high bearish conviction on a stock.

Conclusion

Indeed, I think this could be the most overpriced stock in the universe right now. I can’t find a company that comes close to the absurdness of this valuation. Accordingly, Facedrive finds itself in my high-conviction bearish bucket of stocks right now.

However, the potential downside risk for short-sellers is that, as Keynes said, “the market can stay irrational longer than you can stay solvent.” In other words, if an angry mob of retail investors decides to pick on Facedrive, the stock could go berserk again.

Facedrive is an interesting short opportunity for sure, and I think is almost certainly likely to go down significantly from here. But the market’s crazy right now, and investors are doing crazy things.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

More on Tech Stocks

investment research
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

Is OpenText stock poised for a 2025 comeback? AI ambitions, a 3.8% yield, and cash flow power make it a…

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Emerging Canadian AI Companies With Big Potential

These tech stocks are paving the way to an AI-filled future, but still offer enough growth ahead for a strong…

Read more »

Young Boy with Jet Pack Dreams of Flying
Tech Stocks

Is Constellation Software Stock a Buy, Sell, or Hold for 2025?

CSU stock has long been a strong option for high growth, high value stocks. But are there now too many…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

dividend growth for passive income
Tech Stocks

2 Rapidly Growing Canadian Tech Stocks With Lots More Potential

Celestica (TSX:CLS) and Constellation Software (TSX:CSU) are Canadian tech darlings worth watching in the new year.

Read more »

BCE stock
Tech Stocks

10% Yield: Is BCE Stock a Good Buy?

The yield is bigger than it's ever been in the company's history. That might not be a good thing.

Read more »

Happy shoppers look at a cellphone.
Tech Stocks

So You Own Shopify Stock: Is it Still a Good Investment?

Shopify (TSX:SHOP) stock has had a run, but there's still room to the upside.

Read more »

A person uses and AI chat bot
Tech Stocks

AI Where No One’s Looking: Seize Growth in These Canadian Stocks Before the Market Catches Up

Beyond flashy headlines about generative AI, these two Canadian AI stocks could deliver strong returns for investors who are willing…

Read more »