Avis Budget rally echoes Opendoor, GoPro surges — caution ahead

Avis Budget's stock price has gone through a short squeeze recently, making it one of the top gainers on Wall Street.

It has jumped in the last five consecutive days and moved to its highest point since April 2022.

Avis Budget stock has experienced a short squeeze 

The ongoing Avis stock surge is not based on its fundamentals or new news.

Instead, it is merely a short squeeze as the company is one of the most shorted companies in the United States, with a short interest of over 40%.

Indeed, its financials show that its business is struggling.

The most recent results showed that its revenue dropped by 2% to $2.7 billion in the last quarter.

Its annual revenue dropped slightly from $11.78 billion to $11.6 billion.

Avis Budget’s annual EBITDA was $748 million, much lower than the $900 million that the management had guided for.

Its fourth-quarter EBITDA missed its guidance by $150 million, driven by its Americas segment, which suffered from the government shutdown.

The company also experienced a challenge in selling its vehicles during the quarter as demand for its products slowed.

That led to sharp discounts, which affected its margins.

Lower used car prices also led to a big increase in depreciation.

The recent US-Iran war may also impact its business in the near term.

For example, transport volume in the Middle East has slowed substantially in the past few weeks, and analysts believe that the recovery may take time.

Also, the war led to a surge in prices in the US, which may impact its demand as customers slash discretionary spending.

Analysts believe that Avis Budget business will remain under pressure in the foreseeable future.

The average estimate is that its revenue will come in at $11.76 billion this year, up by just 0.92% YoY, followed by $11.82 billion.

Lessons from GameStop, OpenDoor, and GoPro

When a stock comes from nowhere and surges, it normally attracts retail investors amid the Fear of Missing Out (FOMO).

However, history shows that these gains don't last, especially when the gains are not supported by fundamentals.

There are many good examples of this. The most prominent of these is GameStop, which came from nowhere and surged to $120 within weeks.

Since then, the stock has plunged to the current $23, costing investors who bought it at the time billions of dollars.

Most recently, Opendoor stock jumped from a low of $0.4895 in July last year to $10 in September. Since then, it has plunged by nearly 50% to the current $4.55.

In the same period, GoPro stock jumped from $0.4015 to a high of $3.05 and has now dropped to $0.8.

In short, a quick look at all companies that have experienced a short squeeze in the past few years shows that most of them drop sharply after the hype ends.