What happened
Shares of Canaan (CAN 23.65%) were crushed on Thursday after the company announced a substantial direct stock offering. As of 12:30 p.m. EDT, the stock was down 12%.
So what
In all, Canaan is offering around 17.5 million American depositary shares (ADS) to raise around $170 million. As a reminder, Canaan is an international stock and the ADS are what trade here in the U.S. -- each ADS is equivalent to 15 Class A shares that trade on a foreign exchange. The company is selling over 13 million ADS for $12.60 each to institutional investors. It's also selling over 4 million warrants that can be converted into ADS at an exercise price of $16.38.
Image source: Getty Images.
On the one hand, a move like this is good news for Canaan because it's getting a cash infusion to help research and development (R&D) as well as expanding manufacturing capabilities -- the company builds equipment used for mining cryptocurrencies. That said, moves like this dilute shareholder value. Think of it this way: Each ADS now represents a slightly smaller percentage of the company and is therefore worth slightly less, all other things being equal.
Now what
Does this mean Canaan is a bad investment? Not necessarily -- many top companies have diluted their shareholders before. So by itself, the move is neither good or bad. What matters is how well the company utilizes its money going forward.
Assuming the boom in cryptocurrencies continues for the foreseeable future, it's a good move to spend on R&D and manufacturing. The industry is constantly improving, so it's important for Canaan's technology to keep up. Furthermore, the company is limited right now by its current manufacturing capabilities. With this context, expanding makes sense. But it does assume the cryptocurrency-mining boom is here to stay. This industry has been cyclical in the past so it remains to be seen how this will pan out.
