Markets

Why WiMi Hologram Cloud Stock Was Crashing Today

What happened

Shares of WiMi Hologram Cloud (NASDAQ: WIMI) were crashing on Monday morning after the company announced it's offering new shares at $8.18 per American Depository Shares (ADS). The stock opened 27% down, and was down 33% as of 10:45 a.m. EDT.

It appears WiMi Hologram Cloud's time as a stock market darling was short lived. After rising around 600% in early July, the stock has now lost two-thirds of its value since it peaked.

WIMI Chart

WIMI data by YCharts

So what

According to a press release from the company today, WiMi Hologram Cloud is offering 7.56 million ADS at $8.18 each. That price is about 27% lower than where the stock closed on Friday, and explains today's drop. After all, if the company is willing to sell shares at this price, then it must believe it's getting reasonable value.

Investors are also likely concerned about dilution. When companies issue new shares as WiMi Hologram Cloud has, it can add to the share count. Each share, therefore, represents a smaller piece of the company and is worth less as a result.

A frustrated man places his head down on a table with a red, down stock chart in the background.

Image source: Getty Images.

Now what

When WiMi Hologram Cloud stock first began running higher, I cautioned investors against exuberant optimism. The company primarily generates revenue by creating advertising campaigns for its clients, and it also generates revenue through its middleware software which offers additional payment options in mobile games. There's nothing wrong with these businesses, it's just different from what the company's name leads investors to believe.

As I previously cautioned investors against being too optimistic, now I'll also caution against being too pessimistic on today's news. By offering these shares, WiMi Hologram Cloud will raise up to $61.8 million, minus fees. For perspective, this is more than four times its net income in 2019 -- an enormous haul for a small-cap company like this. 

If the holographic market is truly set to soar as some believe, then WiMi Hologram Cloud has a greater chance of capturing the upside with prudent spending. Therefore, today's news to raise cash could be a good thing in the long run. Investors should monitor sector growth in general, and WiMi management's spending specifically.

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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.

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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