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What happened

Shares of mobile-gaming platform Skillz (NYSE:SKLZ) were soaring on Wednesday after the company announced the acquisition of advertising-technology company Aarki. However, it’s likely the acquisition isn’t the only thing sending the stock higher today, as we’ll see in a moment. As of 1 p.m. EST, Skillz stock was up a whopping 32%.

So what

Skillz is acquiring demand-side platform (DSP) Aarki for $150 million, financed with a combination of stock and cash. The acquisition is good for the company for at least two reasons: First, Skillz should be able to acquire more users by leveraging Aarki’s advertising technology and expertise in mobile-gaming ads. Second, this could also improve Skillz’s cost structure when acquiring new users since it won’t have to deal with third parties as much anymore.

Image source: Getty Images.

Now what

On its own, I don’t believe Skillz’s acquisition of Aarki would send the stock up 32% in a single day. Don’t misunderstand me: I see the acquisition as a potentially beneficial move in the long term. But I don’t think the market is this excited about it. Rather, this could be a short squeeze coming into play.

According to Yahoo Finance, roughly 25% of the float for Skillz stock was sold short as of May 14. However, according to other sources such as Fintel, there are very few shares available to short, and the cost to do so is quite high. Without getting too complicated, this simply means that there’s a lot of people betting against Skillz stock, but the high cost of shorting means they can’t afford to wait too long for it to go down.

With short squeezes, short sellers purchase shares to cover their positions, making the stock go up. Short squeezes have been in the news in 2021 with stocks like GameStop. But GameStop was an unusual case: Retail investors banded together to get that snowball rolling downhill. What’s happening today with Skillz is the more common version of a short squeeze. The Aarki acquisition is a positive development and the short-squeeze catalyst. Even short sellers with high conviction likely recognize this move could prevent Skillz stock from going down for a while. Therefore, they’re choosing to end their bet against Skillz stock now.

The problem with short squeezes is they aren’t the kind of thing that sustains a stock in the long term. Therefore, long-term investors need to recognize that today’s move might not hold in the days and weeks ahead. For Skillz stock to go up and beat the market long term, it will need to keep growing its business. Management is excited with how many users have become paying users in recent months. But the company will need to grow its overall user base as well as become a market beater, in my opinion. Therefore, it’s important to watch how the Aarki acquisition catalyzes user growth in the coming quarters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.