Bed Bath & Beyond (BBBY) has become one of the most talked about ‘meme stocks’ on Reddit investing forums like r/wallstreetbets. The home goods retailer’s stock has seen huge volatility and massive price swings this year, largely driven by bullish sentiment and heavy buying from retail investors. In January, BBBY surged as much as 107% in two weeks amid high volumes. After declining later, it again rallied nearly 300% in August as retail investors returned. However, fundamentals remain weak for BBBY which continues to post losses. The dichotomy between Reddit investors’ optimism and BBBY’s poor financials has resulted in its price gyrations. But some analysts think the short squeeze potential could lead to more upside for BBBY stock.
Retail fervor on Reddit has fueled BBBY’s rallies
A key reason behind BBBY’s massive price spikes is the hype among retail investors, especially on Reddit forum r/wallstreetbets. Threads promoting BBBY stock and bullish options trades often get thousands of upvotes and comments. The resulting retail buying frenzy is a big driver of short term price surges. For example, in March 2022, a post about buying BBBY calls received over 30,000 upvotes, leading to a doubling of its stock price within 5 days. Again in August, Reddit chatter about a possible short squeeze sent the stock rocketing from $5 to $30 in less than 3 weeks. However, such Reddit fueled rallies are often not sustainable as sentiment can shift rapidly. Prudent investors should be cautious about getting caught up in the hype.
Heavy short interest makes BBBY a potential short squeeze candidate
One reason BBBY is popular among Reddit traders is its high short interest. As of mid-August 2022, over 40% of BBBY’s free float was shorted making it vulnerable to a short squeeze. Short squeezes happen when short sellers are forced to cover their positions by buying back stock, driving up the price exponentially. Gamestop and AMC’s epic short squeezes in 2021 were also kickstarted by Reddit traders aiming to punish short sellers. BBBY appears primed for a similar squeeze looking at its huge short interest. Its August rally was partly fueled by short covering. If retail investors can coordinate buying via Reddit, they can potentially trigger more short covering leading to dramatic price spikes. However, short interest can also rapidly decline limiting upside.
BBBY’s continued operating losses raise doubts about its viability
While Reddit traders remain highly optimistic, BBBY’s poor fundamentals tell a different story. It has reported losses each quarter since 2019 as sales declined due to competition from online retailers. BBBY closed stores, cut jobs and sold assets to improve its balance sheet. But its turnaround plans have failed to boost growth. In Q1 2022, BBBY’s sales fell 11% while its net loss widened to $358 million. Inventory bloat, supply chain issues and inflationary pressures further hurt its performance. Its liquidity position is also worsening. Unless BBBY shows concrete signs of a turnaround like Gamestop did, its stock price is unlikely to be supported by fundamentals.
Technical factors indicate room for more gains if momentum sustains
Despite fundamental weaknesses, BBBY stock’s technical setup remains favorable for further upside. Its relative strength versus S&P 500 is very high, indicating strong momentum. BBBY is trading well above its 20, 50 and 200 day moving averages which is bullish. Volumes on up days are outpacing down day volumes, reflecting accumulation. The MACD indicator also shows a positive trend. Moreover, BBBY has good support at around $10 levels currently. As long as retail buying interest persists, the technical landscape supports the possibility of BBBY rising to test its previous highs around $30. However, any breakdown below $10 could lead to rapid unwinding of long positions.
In summary, BBBY’s epic price swings and massive volatility are being driven largely by bullish retail investor sentiment on Reddit rather than fundamentals. Its huge short interest makes it prone to short squeezes which could trigger more sharp rallies. But until BBBY’s business shows signs of improvement, its stock remains high risk given weak financials. Prudent investors need to weigh the risks of buying into the hype against the potential for short term gains if momentum continues.