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A company has a high dilution risk rating, why did the stock still go up?
A company has a high dilution risk rating, why did the stock still go up?
Shawn Stevenson avatar
Written by Shawn Stevenson
Updated over a week ago

If there is substantial demand for a stock, then it can offset any dilution. The following are common variables that increases demand and reduces dilution impact:

  1. Large market cap - The larger the market cap, the more likely it is a higher quality company with willing institutional investors that are eager to participate in any financing. With sufficient institutional demand, a company can get a higher pricing, lower % dilution, and ultimately smaller impact on the stock price.

  2. High Institutional Ownership - If a company already has existing reputable institutional investors, it is also more likely to be a higher quality company. These existing investors can also easily add to their positions by participating in an offering, thus increasing institutional demand and improving pricing in any future offering.

  3. Positive news that substantially increases a company's fundamental value - In the case of very positive news such as a positive surprise in a major clinical trial release, the company's value may have increased multiple fold such that there are plenty of institutional investors willing to buy a subsequent offering.

  4. Low cash need and trading below cash - If a company is not in desperate need of cash (>24 months cash) and its valuation is already depressed such that it's trading at a significant discount to cash, then it may not choose to offer even if it has the ability to or an active ATM in place. The exception is some Chinese companies where the cash may not actually exist and siphoned out.

  5. Extraordinary bubble market where everything is going up - in the wake of the everything bubble in 2020-2021, many extremely low quality companies were able to issue billions of dollars while it's stock was climbing higher without any consequences (e.g. CEI, SNDL, NNDM). One would need to factor in the retail fund flow and strength of the small cap market to gauge this variable.

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