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Why Shift Technologies Stock Plunged Today

By Jon Quast - Updated May 24, 2021 at 12:31PM

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Ongoing cash burn is leading the company to raise some cash.

What happened

Shares of used-car e-commerce platform Shift Technologies (SFT -6.67%) plunged on Monday after the company announced a substantial convertible debt offering. As of 10:45 a.m. EDT today, the stock was down 15% and is now 55% down from its 52-week high.

So what

According to the official press release from the company, Shift Technologies is looking to raise $75 million with convertible notes. These notes won't be due until 2026. However, other terms of the offering are still contingent on market conditions. In other words, the higher the demand for the notes, the better the terms will be for Shift Technologies and its shareholders. But we'll just have to wait and see.

A frustrated man looks at his laptop screen.

Image source: Getty Images.

Now what

Of course, this move by Shift Technologies is a reminder of its ongoing need for cash. As of the first quarter of 2021, it had $177 million in cash and equivalents -- substantial for a small-cap stock like this. But its business isn't close to reaching profitability. It's true that this company's gross profit was much improved in the first quarter. But it still only has a gross-profit margin of just 7%, which isn't very much. Moreover, its expenses are still high. For example, during the quarter, it spent twice as much on marketing as it made in gross profit.

Because Shift Technologies is still a low-margin business with high expenses, it had a massive first-quarter operating loss of $71.5 million. So while $177 million in cash reserves looks like a lot on the surface, the reality is cash burn is high and could be that way for a while. That's why the company is raising cash now with a convertible note offering. 

For now, Shift Technologies will fund its business through financing. That's fine. The question investors need to ask is how long will it take before the business is being funded with cash flow? It might be a while. Therefore, be prepared to invest accordingly. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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