Chapter 1: Understanding Knightscope's Market Dynamics

Knightscope has been characterized by significant market fluctuations, raising the question: Is it truly a wise choice for short-selling?

There has been extensive discussion surrounding Knightscope and its valuation, and I have voiced my concerns regarding its viability. Nevertheless, betting against the company through short-selling could lead to severe consequences for those who consider this a prudent strategy. The primary concern is the exposure to unlimited liability that short-sellers face, which history has shown can lead to devastating financial outcomes. Numerous cases, including those of GameStop, Tesla, AMC, and others, illustrate the risks involved. While some of these stocks eventually saw declines, many investors had already incurred substantial losses, and some hedge funds even faced bankruptcy. I often liken such investments to "picking up pennies in front of a freight train." Although it may seem possible to profit, the risks of a sharp downturn can be overwhelming.

While the prospect of Knightscope going bankrupt could justify a short position, the likelihood of such an event is questionable. How inflated is Knightscope's valuation? Is there potential for a short squeeze? Let's delve into why short-selling this stock may be a misguided approach.

Section 1.1: What is Short-Selling?

For those unfamiliar with the concept, short-selling involves borrowing shares of a stock and selling them at the current market price, intending to buy them back later at a lower cost. The difference between the selling price and the repurchase price becomes the profit, after accounting for any borrowing fees. These fees can vary, with higher rates indicating more difficulty in securing shares to short. A borrow fee of 10% is considered steep, and a short interest exceeding 5-10% is deemed significantly high.

When a large number of short positions are established, it can exert downward pressure on the stock's price, akin to everyone selling their shares simultaneously. Conversely, a "short squeeze" occurs when short-sellers scramble to buy back shares to close their positions, driving the price up dramatically due to limited availability.

Subsection 1.1.1: Knightscope's Short Data

While precise short interest data for Knightscope is unavailable, it is evident that it is significantly high. According to Fintel, the borrow rate sits at an astonishing 196%, with reports of it reaching as high as 260%. This stark contrast to the typical 10% benchmark highlights the difficulty in shorting this stock.

Furthermore, the short volume has consistently been elevated, with an estimated 20 million shares outstanding and over 30% short volume daily. For instance, on January 31, a staggering 9.6 million shares were shorted in a single day, indicating that nearly half of the available shares were sold short. Although there has been a recent decline in overall and short volumes, this is likely due to the scarcity of shares available for shorting.

Chapter 2: Earnings and Future Prospects

The last audit or earnings report from Knightscope dates back to June 2021. While the findings were not favorable, this creates a dilemma for short-sellers. Earnings reports, typically released quarterly, can display significant volatility. The absence of financial data for nearly a year could lead to unexpected results, and any positive news could spell disaster for those holding short positions. Smaller investors may face margin calls, exacerbating the issue.

Another crucial factor is Knightscope's operational efficiency. The company has been grappling with a substantial backlog, attributed to COVID-19 and supply chain disruptions. Currently, it takes approximately 100 hours to assemble a robot, which is not sustainable. However, Knightscope plans to streamline this process, reducing assembly time by 80% to just 20 hours. This efficiency boost could allow them to fulfill their backlog within months, significantly enhancing their delivery capabilities.

Knightscope also has potential alternative revenue streams. They gather considerable amounts of data from their robots, which could be monetized effectively. This data collection is more responsibly sourced compared to other tech giants, as it primarily involves public data from private properties. As their fleet expands, these data insights could become highly lucrative.

In summary, Knightscope operates in several burgeoning sectors, making short-selling a precarious strategy. If investors could not undermine companies like GameStop and Bed Bath & Beyond during a pandemic, it seems unwise to bet against a company actively innovating within the AI and robotics markets. A single positive announcement or earnings surprise could propel the stock to new heights, as the market seeks the next major player akin to Tesla. Predicting the future is challenging, but this is a dynamic business in an expanding industry, and I would be cautious about betting against it.