Shares of The9 Limited (NCTY 7.43%) traded sharply higher on Wednesday for a variety of reasons. As of noon EST today, the stock was up 10% after trading as much as 23% higher earlier in the session.
Yesterday, The9 announced new developments in its Bitcoin (BTC 1.98%) business. The company has signed agreements to purchase over 10,000 Bitcoin mining machines. To fund these purchases, it intends to issue 196,125 new American depositary receipts (ADRs) at $38.51 each. But the price per ADR and amount of new ADRs to be issued are subject to change over the next six months.
There are two negatives with this announcement. First is shareholder dilution. Second, consider that The9 stock trades substantially higher than the price at which it will sell new shares. This suggests there's a belief the stock is overvalued. Nevertheless, investors are bidding the stock higher by considering the positive side of this news: The9 is increasing its Bitcoin mining capability.
According to the press release, the new Bitcoin mining machines will have a hash rate of around 192 petahashes per second (PH/s). Bitcoin mining is measured with the total hash rate, which currently sits at around 157 million terahashes per second (TH/s), according to Blockchain.com. Just for simplicity, 157 million TH/s is the same as 157 thousand PH/s. In other words, if The9 had already deployed its new Bitcoin mining machines, they would equate to a little more than 1/10th of 1% of the total hash rate.
While that's a small operation, the market is rewarding The9 stock today anyway as the price of Bitcoin rises. Furthermore, many high-flying stocks are soaring this week, recovering from steep sell-offs that started in February.
The9 will report financial results on March 30 before the market opens. With a market capitalization already over $600 million, I believe it's fair to say it's gotten ahead of the business fundamentals. For that reason, the company will need to meet high expectations and set strong guidance if it has much hope of continuing its stellar run.