For listed companies, it's always best to wait for the frenzy of the stock market to subside when announcing negative news. That seemed to be the case after market close Thursday when Super Micro Computer (SMCI +7.91%) announced a major new secondary stock issue; the following day, investors expressed their displeasure by trading down the shares. Let's take a brief look as to whether this was justified.
The stock issue should raise over $500 million
If successful, Supermicro estimates that the flotation will bring in gross proceeds of $524 million. Somewhat atypically for a company announcing a fresh stock issue, this one went into detail about how it will use those monies. It said they will be utilized to "support our operations, including working capital needs, manufacturing capacity expansion, and increased [research and development] investments."
It's hard for any investor to take issue with that. After all, Super Micro operates in the high-end, specialty hardware segment of the tech industry. It requires gobs of capital to develop cutting-edge solutions that meet the demands of a sector constantly in need of the best and most reliable technology. This goes double for the current artificial intelligence (AI) gold rush, in which many companies are scrambling to compete.
Rather, the market is unhappy that the company will be diluting its existing shareholders at a rate of around 4% (assuming full take-up of a share purchase option held by the issue's underwriters). While that's not an alarming amount, it drains the value of current stock enough to warrant some concern.
NASDAQ: SMCI
Key Data Points
Little cause for alarm
In a bull market, it's common for companies to sell additional equity to help finance their operations. With the AI craze showing little signs of abating, this is a good time to go to the well. I don't feel Super Micro's move is desperate; rather, it's an opportunistic push at raising no-cost funds. This company's business is well positioned to outperform, and a modest bit of share dilution shouldn't get in the way of that success.
