I’ve seen this movie over and over again. A stock rages upward, and instead of letting investors simply enjoy the ride the company has to ruin it by issuing (diluting) more shares. This is just the first volley – expect more of the same from the technology sector that has enjoyed a huge rebound from the bottom.
Just before the next wave of troubles (I can’t say what will cause it, other than history just keeps repeating itself) in any industry that’s become a darling we witness a flurry of equity issues. Our most recent (sour) experience was the cannabis industry. It’s uncanny that just yesterday I suggested the tech group has had enough of a surge to become uninteresting again from a valuation perspective.
I can imagine the discussion in the executive offices:
The stock is over $700, and we’re worth more than the Royal Bank.
What should we do? The next few quarters could get ugly as our small business customers are likely going out of business.
I know, let’s issue some shares at these ridiculous prices.
Do we need the money?
We might or we might not, but who cares? Let’s get some anyway.
Yeah, after all we only need to issue 1.85 million shares to raise over a billion bucks. This craziness can’t last.
To quote the distinguished Som Seif of Purpose Investments: “If I was sitting there last night thinking about Shopify’s price, I would have said to myself they should issue shares at this price because if other people are giving them such a crazy valuation, why not take some money and put it on your balance sheet at a time when cash on your balance sheet is a very valuable thing.” (from BNN Bloomberg News).
It’s depressing how difficult it is to find companies that just want to run their businesses rather than jump on every opportunity to milk investors.