Why Fisker Stock Crashed Today

What happened

Shares of start-up electric car company Fisker (NYSE: FSR) were suffering from an 8.6% sell-off at 11:15 a.m. EDT on Thursday. That comes two days after it jumped as much as 30% after receiving a bullish endorsement from Morgan Stanley.

Big red arrow going down over a stock chart

Image source: Getty Images.

So what

Capitalizing on the strong share-price surge that followed Morgan Stanley's announcement, Fisker made an announcement of its own after the close of trading last night: It is selling $600 million worth of convertible senior notes due in 2026 in a private offering, and perhaps as much as $690 million worth of these notes if buyers exercise an overallotment option.

Now what

For investors, this means either (or eventually, both) of two things. On the one hand, these notes are debt, and Fisker will have to pay interest. This isn't an entirely bad thing. Convertible notes often carry low interest rates, and let's not forget that Fisker will get nearly $700 million in funding out of this sale with which to grow its business.

The other thing to keep in mind is that convertible notes can potentially be converted into stock, and if that happens, then investors could be looking at as many as 41.4 million new Fisker shares flooding the market, potentially diluting existing shareholders by more than 20%.

In that case, Fisker would get to keep all the cash from this offering, and not pay it back. But shareholders would still be looking at some significant dilution of their claims on future profits. And that's a pretty good reason for Fisker stock to be down today.

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Rich Smith 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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