Support.com, Inc. (SPRT - Get Rating) provides technical and customer support solutions through home-based employees in several verticals in the United States. It was added to the Russell Microcap index on June 28. Surging retail investor interest has helped the stock gain 494% over the past year and 271.1% over the past six months; it is frequently discussed on popular subreddits—r/swingtrading and r/pennystocks.

The meme stock has been gaining popularity owing to its scheduled merger with Greenidge Generation LLC.

However, several concerns surrounding this transaction, such as potential dilution of ownership of SPRT shareholders and investigations regarding potential regulatory violations are harbingers of a  bearish outlook for the stock.

So, here’s what we think could shape SPRT’s performance in the near term:

Short Interest

Of SPRT’s  8.20 million floating shares, 5.13 million have been sold short (as of July 14). Furthermore,  the stock has a 3.1 short ratio. Retail investors are betting on this stock primarily on  its forthcoming  merger with Greenidge Generation Holdings Inc. As a result, shares of SPRT have gained 91.1% over the past month and 27.1% over the past five days.

Proposed Merger and Lawsuits

SPRT is currently being acquired by vertically integrated bitcoin mining company Greenidge Generation LLC and  will become a subsidiary of Greenidge Generation Holdings Inc. following this acquisition, which is expected to be completed in the third quarter of 2021. The combined company, which is expected  to be listed on the Nasdaq stock exchange, should be the only publicly traded vertically integrated power generation asset and bitcoin mining company.

However, the proposed merger is currently being investigated by several law firms to identify alleged  breaches of fiduciary duty and other violations of federal securities laws by SPRT’s board of directors.

Bleak Past Performance

SPRT’s revenues have declined at a 12.7% CAGR  over the past three years. Its  total assets and tangible book value declined at a 9.8% CAGR  over this period. Moreover, the company’s revenues and operating income declined 27.4% and 197.2%, respectively, year-over-year. SPRT’s EPS has declined 174.1% over the past year, while its levered free cash flow fell 214% over this period.

In the fiscal first quarter ended March 31, SPRT’s revenues declined 19.4% year-over-year to $9.63 million. Its gross profit slumped 16.5% from the prior-year quarter to $3.54 million. Its net loss came in at $1.99 million, translating to a $0.10 loss per share. In addition, SPRT incurred $1.50 million in merger-related expenses and $0.20 million in transition-related costs to refocus its operations in the first quarter.

Unfavorable POWR Ratings

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

SPRT has a D grade for Growth and Value. Its bleak growth history and higher-than-industry valuation justify the grades. SPRT’s 68.88 trailing-12-month Price/Cash Flow multiple is 210.3% higher than the 22.20 industry average.

Of the 138 stocks in the D-rated Software – Application industry, SPRT is ranked #118.

Beyond what I’ve stated above, we have rated SPRT for Momentum, Quality, Sentiment, and Stability. Click here to view all SPRT ratings.

View the top-rated stocks in the Software – Application industry here.

Click here to check out our Software Industry Report for 2021

Bottom Line

Following the completion of the merger, SPRT shareholders are expected to retain an 8% ownership of the newly formed entity, while Greenidge shareholders will hold the remaining 92%. In addition,  SPRT shareholders are entitled to 0.124 shares of Greenidge class A common stock for each share of SPRT. However, the potential dilution of ownership and consequent decline in ROE we think make SPRT best avoided now.

Click here  to check out our Cryptocurrency Industry Report for 2021

SPRT shares were trading at $7.68 per share on Friday morning, down $0.15 (-1.92%). Year-to-date, SPRT has gained 249.09%, versus a 18.24% 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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