Shares of Twist Bioscience (NASDAQ:TWST) rose nearly 15% today after the company announced the pricing of a public offering of common stock. The DNA synthesis pioneer will issue up to 5.3 million shares at $28 apiece. The offering could bring in gross proceeds of up to $150 million.
A company's stock usually declines after the announcement of a public offering of common stock. The markets tend to adjust the share price lower to account for the dilution of existing shareholders, while keeping the market cap at about the same level. For example, the latest offering from Twist Bioscience will increase the number of shares outstanding by 15%, which is roughly the decline investors might have expected from today's news.
As of 11:00 a.m. EST, the small-cap stock had settled to a 13.5% gain.
Why are shares rising on news of dilution? There are a couple of potential explanations.
First, Twist Bioscience is in constant need of cash. The company reported an operating loss of $70 million in fiscal 2018 and an operating loss of $108.8 million in fiscal 2019. It expects a net loss of at least $107 million in fiscal 2020, which rises to $129.5 million when a recent legal settlement is included. The business ended December with $103 million in cash and raised a small amount of cash last month (also through a public offering of common stock). Therefore, raising up to another $150 million in gross proceeds removes any near-term concerns of a cash crunch.
Second, through a separate and unrelated filing, investors learned today that Illumina owned 5.1% of Twist Bioscience at the end of 2019. But the customary end-of-the-year disclosure isn't really news.
Illumina owned a 6.3% stake in Twist Bioscience at the time of the initial public offering (IPO) in October 2018. The proportional stake has fallen since then due to dilution. For instance, if Illumina didn't take part in the two stock offerings since the beginning of this year, then its stake will drop to 4.2% after the latest offering is completed.
Considering operating losses have grown for eight consecutive quarters, investors are happy to see Twist Bioscience raise what amounts to another year's worth of cash. But tapping into the public markets has its costs. If all of the shares up for grabs in the latest offering hit the market, then the number of outstanding shares will have increased 53% since the IPO. That's a significant amount of dilution in a 16-month span. If Twist Bioscience can't start growing gross profits faster than operating expenses, then investors might stop giving the company the benefit of the doubt.