What happened
Shares of MicroVision (MVIS 8.61%) are soaring again this week. Heading into today's trading session, the machine-vision specialist's share price had risen 46.6% from last Friday's market close, according to data from S&P Global Market Intelligence.
While there isn't any business-specific news driving the rally, MicroVision is benefiting from a short squeeze. Following this week's rally, the stock is now up 225.5% year to date.
So what
MicroVision specializes in light-detection-and-ranging (lidar) technologies for automobiles and other machines. With the company currently generating very little revenue and recording substantial losses, some investors had bet on its stock losing value.
Investors can try to profit on a stock going down by shorting its shares. This involves borrowing stock with the expectation that they will be able to buy shares back at a lower price and make the difference in the prices as profit.
But when a stock starts to rise quickly, short sellers are incentivized to buy back the stock at higher prices. In turn, this buying action can work to send the stock price even higher -- a dynamic known as a short squeeze.
Now what
Even with its explosive gains this year, MicroVision stock is still down roughly 71% from the lifetime high that it reached in 2020. Investors should be cautious about buying into the stock on the heels of the recent rally.
In the first quarter, MicroVision recorded a net loss of $19 million on revenue of $800,000. The company remains in the early stages of scaling up its business and has a highly growth-dependent valuation.
MVIS PS Ratio (Forward) data by YCharts
With the company currently valued at roughly 112.5 times this year's expected sales and rallying due to a short squeeze, MicroVision stock looks very risky right now. The company closed out Q1 with $67.7 million in cash and equivalents and could raise additional funding through stock sales, but the recent valuation surge doesn't appear to have anything to do with the business's fundamentals or growth prospects.
While there are occasionally exceptions, most short squeezes wind up being relatively short lived. Betting that MicroVision stock will sustain its rally doesn't look like a smart move right now.
