What happened

Shares of recently IPO'ed Chinese online grocer Dada Nexus (NASDAQ:DADA) crashed in response to news of a secondary offering that will further dilute its shareholders Thursday. In 3 p.m. EST trading, Dada Nexus stock is trading down 15%.

And yet, the news shouldn't have come as a complete surprise.

Chinese flag superimposed on a stock market chart

Image source: Getty Images.

So what

Dada Nexus actually told investors back on Monday that it was planning to float 9 million American Depositary Shares (ADSs), representing 36 million shares of ordinary common stock. It did not, however, mention on Monday the price at which it would be doing the offering.  

This news broke early today, and investors who were already holding Dada Nexus ADSs, which sold for more than $53 at close of trading yesterday, weren't pleased to learn that new investors will be able to pick up new ADSs for just $50 apiece. They might also have been displeased to learn that Dada might allow underwriters to buy additional shares of the already discounted stock, growing the total size of the offering to 6.35 million ADSs -- representing 25.4 million shares of common stock.

Now what

Still, I have to wonder if investors aren't perhaps overreacting here. In total, Dada Nexus's stock offering is only going to dilute existing shareholders out of perhaps 2.7% of their ownership interest in the company (i.e., not a lot). And with Dada Nexus stock up more than three times in value over the last 12 months, now seems like a good time to take advantage of an inflated stock price to cash in some chips.

In this regard, Dada Nexus should collect $317.5 million in cash, minus fees -- monies the company plans to plow into "marketing initiatives and growing its user base, for investing in technology and research and development" (as well as for "general corporate purposes"). With Dada Nexus currently unprofitable and burning cash ($176.5 million over the past 12 months), the company could certainly use the cash.

And come to think of it, maybe that is actually a better reason to sell the stock.

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.