American Virtual Cloud Technologies, Inc. (AVCT) is a premier global IT solutions provider. The company specializes in communications-as-a-service services. The company acquired Kandy Communications in December 2020 to expand its offerings in the cloud computing space. AVCT was named in the CRN 2021 Tech Elite 250 list for the ninth consecutive year in April.

The stock has been gaining traction among meme investors, with 129 actual mentions on the popular Reddit forum r/shortsqueeze over the past 24 hours. Approximately 15% of the total real posts (excluding bots and spam) on the r/shortsqueeze group have been about AVCT over the past 24 hours, making it the most talked-about stock on the forum.

Shares of AVCT gained 74% over the past month to reach $2.58.  Here’s what could shape AVCT’s performance in the near term:

Expanding Market Reach

On December 15, 2021, AVCT announced that its subsidiary Kandy Communications expanded its full Public Switched Telephone Network replacement services to Brazil and China. The company’s fully featured telephone services are currently available in 40 countries, while its Inbound DID services are available in 87 countries. Also, its toll-free services are available in 105 countries.

Regarding this, Kandy President Chuck Canton said, “This expansion reinforces Kandy’s position as a global white-label cloud communications solution provider for our many channel partners, service providers, and large enterprise customers.”

Heavily Shorted Stock

As of December 24, 2021, approximately 4.71 million shares of AVCT, or 13.2% of the float, are sold short. Generally, short interest as a percentage of the float of higher than 10% indicates a significant pessimistic sentiment in the market. It has a short ratio of 0.16 (as of December 14, 2021).

However, this makes AVCT ideal for a potential short squeeze. With increasing meme investor interest, AVCT might witness a GameStop Corp. (GME) like short squeeze in the near term.

Equity Financing

In November 2021, AVCT sold 2.50 million shares priced at $2 per share and a warrant to purchase additional 2.50 million shares in a private placement. The company raised $5 million in gross proceeds through this offering. Also, AVCT stands to raise an additional $5 million if the warrants are exercised in full.

On December 14, 2021, the company entered into a securities purchase agreement with an institutional investor. AVCT sold $25 million worth of equity to the institutional investor under this agreement.

AVCT plans to utilize these funds to facilitate its organic growth and explore strategic acquisition opportunities. However, such equity financing results in equity dilution, thereby reducing EPS and ROE for existing shareholders.

High Debt

AVCT’s trailing-12month total debt stands at $17.61 million. With $4.20 million in cash, the company’s net debt stands at $13.41 million. However, AVCT’s poor cash flows raise concerns regarding its ability to meet its debt repayment obligations. Its trailing-12-month net operating cash outflow came in at $34.85 million. Moreover, the company’s book value per share is negative $0.29. This indicates that AVCT’s liabilities are higher than its assets.

POWR Ratings Reflect Uncertainty

AVCT has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

AVCT has a grade of C for Stability and a D for Quality. Its relatively high 0.72 beta is in sync with the Stability grade. In addition, the company’s trailing-12-month net income margin is negative 89.32%, justifying the Quality grade.

Of the 78 stocks in the C-rated Technology – Services industry, AVCT is ranked #55.

In addition to the grades I’ve highlighted, view AVCT ratings for Growth, Sentiment, Value, and Momentum here.

Bottom Line

AVCT is currently one of the most discussed stocks in the Reddit r/shortsqueeze forum. The stock has gained more than 70% over the past month. As meme stock interest strengthens, AVCT might witness explosive gains over the near term. However, the company’s equity financing operations might reduce total shareholder returns further if the outstanding warrants are exercised. Moreover, the company has negative profit margins. Thus, investors should wait until its profit margins and ROE improve before investing in the stock.

How Does American Virtual Cloud Technologies, Inc. (AVCT) Stack Up Against its Peers?

While AVCT has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Celestica, Inc. (CLS) and NetScout Systems, Inc. (NTCT) which have a B (Buy) rating.

AVCT shares were trading at $2.57 per share on Monday afternoon, up $0.14 (+5.76%). Year-to-date, AVCT has declined -64.31%, versus a 28.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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