Post-Merger Greenidge Generation Is Suffering From Bad Timing
Greenidge Generation Holdings Inc. (NASDAQ:GREE) recently went public via a reverse merger on Sept. 15. Ever since then, GREE stock has lost more than 50% of its price. It currently trades around $25.
The reverse merger gave shareholders 115 shares of GREE stock for every 1,000 shares of Support.com stock they held. On the first day after the merger, its opening price was $57. It reached a high price of $60, then fell to $43.40 by the time the market closed.
Closing lower on the first day of a trading debut is not usually considered a positive thing, as it creates selling pressure. In fact, only a few weeks later, GREE stock has dropped considerably.
The Backdrop of GREE Stock
In August, I wrote that the merger would be a key catalyst for SPRT stock. History proved me correct, as before the upcoming merger, the stock had a very strong selloff. I wrote that this deal made sense, but “all things considered, I find the stock too pricey despite Support.com’s strong financial health. Its new Bitcoin exposure makes things far riskier for shareholders now.”
Earlier in the piece, I elaborated on my concerns:
“The major problem is that Support.com will now have exposure to the price of Bitcoin and thus become a crypto mining play. I am not certain if SPRT shareholders will agree that this shift is worth the risks. Currently, cryptocurrency is highly volatile and facing strict regulatory problems.”
I felt some key financial metrics, such as weak revenue and net losses, were worrisome and made SPRT stock too pricey. I also noted that revenue decreased by 23% year-over-year, which was not good news for Suppport.com when the merger was close at hand.
Then, on Sept. 24, the crypto market was hit with the news that regulators in China decided to completely ban cryptocurrencies. The restriction covers all activities, from trading to mining.
This was not unexpected news, as China has been not friendly to the cryptocurrency market for quite some time. But for Greenidge Generation, which owns and operates crypto mining facilities, this is a huge problem.
Bitcoin’s Future Depends on Short-Term Prices
Trying to predict the price of Bitcoin (CCC:BTC-USD) is a tough task. I have read predictions about Bitcoin hitting $100,000 by end of 2021, or $500,000 in five years. But the true question to me is whether Bitcoin will hold its well-tested $40,000 price level in the short term.
For quite some time now, Bitcoin’s price has remained within a range of $40,000 to $50,000. This is ideal for traders and investors, as it makes trading in Bitcoin “predictable.” When the boundaries of a range are tested and defined, investors can somewhat reliably buy near the bottom boundary and sell near the upper boundary. The true risk now is in how long this range will hold — at some point, a breakout will occur.
The lower boundary is riskier to break, and if that happens, Bitcoin could move much lower than $40,000. Why is that? It has to do with supply and demand, plus the total ban on the cryptocurrency market in China.
Regulators in China have made it clear that all activities related to cryptocurrency are illegal. If those who hold crypto in the country get the chance to sell, they will likely take it. The outcome would be an increased supply of Bitcoins, which would drive its price lower. As a result, a rapid breakdown of the $40,000 level would lead to a selloff thanks to the FOMO (fear of missing out) effect.
Global Regulation of the Crypto Market Is Coming
What if other countries follow in China’s footsteps and start regulating the crypto market? For example, the U.S. appears to be close to a decision on how it will approach cryptocurrency.
According to CNBC, after senators called for crypto regulation, the Securities and Exchange Commission (SEC) Chair Gary Gensler “assured the Senate that the regulator is working overtime to create a set of rules to oversee the volatile cryptocurrency markets.”
Additionally, the site noted that “Gensler told reporters after the Senate Banking hearing that the SEC is weighing different options for how to tackle problems with payment for order flow.”
The SEC’s crypto plan is on a train that is quickly arriving at its destination. It not a matter of whether or not crypto regulation will occur, but rather when it will occur.
Europe and countries all over the world may follow this lead. In this scenario, cryptos will lose their biggest advantage — being part of an unregulated market.
GREE Stock Is Risky in the Wake of These Catalysts
The GREE stock reverse split was a catalyst, but this move is usually not a positive sign for a stock. Although reverse stock splits have no fundamental impact on a company, what matters is the financial health of a stock and its valuation.
I felt strongly about the elevated price of Support.com stock while it was still trading. But now that the merger is a done deal, former shareholders in the customer support company are invested in something completely different. The main crypto business is a far cry from Suppport.com’s focus on customer service and security software.
The business model has changed completely, and thus GREE stock requires a completely different assessment than the previous company. For a bitcoin mining company, the price of Bitcoin is of paramount importance. And with the latest crypto market news and selling pressure on Bitcoin, things do not look good for GREE stock at this time.
Investors should wait to see the next few quarters of financial results and evaluate the market conditions before taking a position. Until then, GREE stock is too risky.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.
