You knew it was coming. 

It was inevitable that MannKind (NASDAQ:MNKD) stock's red-hot momentum would come to an end. The biotech's share price more than tripled in less than two weeks. However, MannKind stock dropped by as much as 20% on Wednesday during intra-day trading after the company announced it was selling newly issued stock. This shouldn't have surprised anyone since MannKind needed to raise more cash and recently completed a warrant exchange that cleared the way for the stock offering.

But while it didn't take a Nostradamus to know MannKind's momentum would at least take a breather, the future for MannKind is more difficult to predict. Should you buy the dip -- or stay away? Here are what I think are the best arguments for each option.

Man with hands held up to head behind image of stock chart

Image source: Getty Images.

Buy that dip

There are three reasons that I see why investors might want to buy the recent dip in MannKind stock. First, look at the price tag the biotech put on its stock offering -- $6 per share. The sell-off on Wednesday drove MannKind's share price well below that level. If big institutional investors are willing to pay $6 per share, there's a pretty good argument to be made that the stock is at least worth that much (and probably more). That would make the current stock price a bargain.

Second, MannKind is selling around $61 million worth of new shares. This move dilutes existing shares (based on MannKind's market cap on Tuesday) by less than 9%. The stock fell a lot more than 9% on Wednesday. If you believe the fundamentals are still in place for MannKind to be successful, buy that dip.

The third reason is similar to the second, but more fundamental. Forget how many existing shares were diluted and the offering price per share. If you think MannKind has a great product in Afrezza and that sales for the inhaled insulin will increase to, say, at least $150 million or so, buy the stock now -- dip or no dip. The only thing that matters for long-term investors with a positive outlook on MannKind is that the company will now have additional cash to keep operations going while Afrezza picks up steam.

Take the money and run (or just run)

Now, let's take the opposite perspective. Was MannKind's huge stock run-up really warranted in the first place? If you don't think so, take the money and run -- assuming you bought the stock earlier. If you didn't buy the stock, just run.

There's good reason to believe that many of the big gains enjoyed by MannKind shareholders were the result of a classic short squeeze. Nearly 30% of MannKind stock's float was sold short prior to the stock taking off. Short-sellers were no doubt in a tizzy, gobbling down antacids as they feverishly covered their positions, driving MannKind stock even higher in the process.

However, with fewer short-sellers available to scoop up shares, investors attempting to take the money and run could find lower numbers of buyers than they'd like. This could become a self-perpetuating cycle that pushes MannKind stock down even more.

MannKind's financial position is yet another reason why investors might want to take a pass on the stock. Just do the math. The company ended the second quarter with $43.4 million in cash and cash equivalents. The just-announced stock offering will net MannKind somewhere around $58 million. That gives the company somewhere in the ballpark of $101 million. But MannKind is losing almost $12 million per month. Even if Afrezza sales pick up somewhat, the biotech will probably be going back to the well to raise more cash by mid-2018. More dilution is likely on the way.

The most important reason to stay away from MannKind stock, though, is if you harbor serious doubts about the company's ability to succeed over the long run. After all, a much bigger drugmaker, Sanofi (NYSE:SNY), threw in the towel on Afrezza. Although MannKind secured label changes for the product that should help it sell the drug more effectively, there's no guarantee that sales will rise as high as the company needs them to do.

Back in the USSR

What should investors do? I like the Cold War strategy taken by former President Ronald Reagan with the then-Soviet Union. Reagan repeatedly used an old Russian proverb to describe his approach: "Trust, but verify." In my view, that's what investors optimistic about MannKind should do.

Count me among those who think Afrezza is a better product than its sales so far demonstrate. MannKind is already doing a better job than Sanofi did at selling the drug -- and with a much smaller team. I like how CEO Michael Castagna is leading the company, and I agree with him that the recent label change for Afrezza should allow MannKind to promote the competitive advantages for the drug more effectively.

But to quote a non-Russian proverb, "The proof is in the pudding." I'd like to see at least one full quarter of sales results with the label change for Afrezza in effect. I'm not negative about MannKind's prospects, but my optimism is tempered with a heavy dose of caution. I won't personally buy the dip with MannKind stock. However, if the company shows that it really will be able to kick Afrezza sales into high gear, this biotech, once written off by many, will definitely warrant serious consideration.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.