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%.
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.
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.
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.