Please ensure Javascript is enabled for purposes of website accessibility

Why The9 Limited Stock Plummeted Today

By Jon Quast - Updated Mar 31, 2021 at 10:39AM

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

This massive stock offering will give management a lot of cash to work with.

What happened

Shares of The9 Limited (NCTY -8.22%) plummeted on Wednesday morning after the company announced a massive stock offering. As of 10:15 a.m. EST today, shares were down a whopping 27%.

So what

For clarity, remember that The9 is an international stock. And like most international stocks, common shares don't trade on U.S. exchanges. Rather, the American depositary receipts (ADRs) are what U.S.-based investors typically buy. Every company's structure is different, but in the case of The9, one ADR equals 30 common shares.

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

Image source: Getty Images.

This housekeeping item addressed, The9 announced it's selling more ADRs and warrants to purchase ADRs. There's also a clause allowing the underwriter to buy ADRs and warrants as well. If everything was exercised, this announcement means over 7.5 million ADRs will be added to the share count. For perspective, there were almost 265 million common shares as of Dec. 31, which is equivalent to about 8.8 million ADRs. Therefore, this one offering alone almost doubles the share count.

Now what

Investors in The9 would do well to remember how the company describes itself. In its press releases, it says, "The9 aims to become a diversified high-tech internet company." That's just about its entire description of its business. It's aiming to become many things, including a miner of cryptocurrencies. Bit it's still very early in its pursuit of these revenue streams.

This means The9 needs cash to develop these businesses. Therefore, it shouldn't be shocking that it's selling ADRs. It's a common strategy for companies like this. For example, SOS Limited just did it yesterday as well. Although it's common, however, investors can't escape the downward pressure this places on The9 stock. It will be challenged as long as management does offerings of this magnitude.

That said, if there's a positive takeaway here, it's that The9 could gross $125 million with this transaction. With judicious capital allocation decisions, that could go a very long way to helping the company become the "diversified high-tech internet company" that management envisions.

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

The9 Limited Stock Quote
The9 Limited
$1.34 (-8.22%) $0.12
SOS Limited Stock Quote
SOS Limited
$0.33 (-8.27%) $0.03

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

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.