What happened
Swvl Holdings (SWVL -10.61%) investors sat out of a big rally early Wednesday, with shares falling 16% by 12:45 p.m. EDT, compared to a 1.9% surge in the S&P 500. The drop added to sharp short-term losses for owners of the mass transit solution provider and was sparked by news of new share issuance.
So what
Swvl said in a press release before the market opened that it has struck a deal to issue stock to an institutional investor. The company is aiming to raise as much as $20 million from the agreement, which allows the investor to purchase shares at a value of around $1.65 per share at any time over the next several years.
New stock issuances will often pressure share prices because they add to the supply of available stock. Existing shares become relatively less valuable as this pool grows, too, because their claim on a company's earnings flow is diluted by the rising share count.
Now what
Swvl is in the middle of a restructuring process that involves laying off nearly one-third of its employees. This deal fits in with that project by providing extra cash that will give executives flexibility as they look for ways to add efficiencies. Swvl is hoping to achieve positive cash flow by 2023.
That goal will be complicated by the many new acquisitions that Swvl has made in the past year, including Urbvan, the mass transit tech platform in Mexico. Yet the stock might still generate solid returns for investors if Swvl achieves its cash flow targets while growing its customer base.
Investors might have hoped that the company could self-fund these projects, but the company apparently hasn't yet achieved that critical financial flexibility and must continue to find outside funding sources.