Please ensure Javascript is enabled for purposes of website accessibility

Why WiMi Hologram Cloud Got Crushed Today

By Jon Quast - Mar 23, 2021 at 12:08PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Management is diluting shareholder value at an alarming rate.

What happened

Shares of WiMi Hologram Cloud (WIMI -8.67%) got crushed on Tuesday after the company announced a substantial stock offering. As of 11 a.m. EDT, the stock was down a whopping 19%. 

So what

WiMi is selling almost 11.2 million units -- not shares -- in this offering, similar to a special purpose acquisition company (SPAC). These units include an American Depositary Receipt (ADR) as well as 0.4 warrants. (ADRs are what many international stocks use instead of directly listing shares on a U.S. exchange.) Let's say you purchase 10 of WiMi's units when the offering closes on March 25. You would get 10 ADRs and four warrants, which entitle you to four more ADRs down the road.

A red arrow crashes down through a floor as a businessman looks on.

Image source: Getty Images.

The units are being sold for $7.50 each, so WiMi is getting $83.8 million by doing this. However, that price is lower than where the stock was trading at the time, so this is a reason the stock is falling today. Furthermore, the warrants are exercisable immediately at $8.60 per ADR and expire in two years. That's hardly the kind of exercise price premium investors have come to expect with warrants. (With SPACs, the exercise price is typically 80% higher than the offering price.) Both prices communicate that either WiMi management or investors (or both) aren't overly bullish about the direction of its stock price over the next two years.

When including the warrants, this stock offering includes over 15.6 million ADRs for WiMi. Considering the company had approximately 75 million ADRs outstanding as of Dec. 31, this is huge dilution of existing shareholder value -- something that's been going on ever since the stock gained a following in mid-2020. 

WIMI Chart

WIMI data by YCharts

Now what

Many investors are very bullish on WiMi Hologram Cloud, due to its patent library with applications across various industries. And the company regularly announces new initiatives that seem to expand its total addressable market. That said, over the past year, WiMi's business results have shown little to the support the prevailing narrative surrounding the opportunity. 

Perhaps one day WiMi's business will finally show how important its hologram technology is. However, until then, it will be hard for this stock to go back up to previous highs if the company keeps issuing new shares at this rate.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

WiMi Hologram Cloud Inc. Stock Quote
WiMi Hologram Cloud Inc.
WIMI
$1.79 (-8.67%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
349%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.