Why Venu Shares Are Plunging Today
Key Points
Venu’s upcoming Q4 numbers should look healthy enough on their own.
The concert venue operator, however, is making capitalization moves that will immediately undermine the stock’s value.
This prospect probably isn’t a good fit for investors who can’t stomach the inherent risk and volatility of owning small companies that regularly need new cash to fund their growth.
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Based on nothing more than its preliminary fourth-quarter results released yesterday afternoon, shares of live-entertainment outfit Venu (NYSEMKT: VENU) should be holding their ground. Its estimated Q4 revenue is up from year-ago levels, reflecting growing ticket sales at a handful of its live-concert locales. CEO JW Roth even went as far as to say within the announcement, "I believe the Company will become operationally profitable by the end of 2026."
Yet, as of 12:15 p.m. ET today, Venu stock is down 33%. What gives?
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The other news also released after Tuesday's close is the likely culprit.
Shareholder dilution ahead
Getting straight to the point, Venu is diluting existing shareholders' stakes by issuing more shares of its own stock. A lot of it, in fact. Per the company's press release, the company intends to sell an additional $75 million worth of its own shares in the very near future.
Image source: Getty Images.
It hasn't yet specified exactly how many new shares it will sell directly to investors. Before today's stumble, however, Venu's market cap was right around $370 million, implying a 20% increase in its total share count looms. Of course, this translates into a 20% decrease in the stock's mathematical value as of just yesterday.
More risk and volatility than most
Dilution isn't always a bad thing -- sometimes a company can clearly do something constructive with a fresh injection of cash. And, there's no denying Venu's recent investments in new live-concert facilities are showing promise. Perhaps JW Roth is correct about his company swinging to an operating profit before the end of this year. There are certainly riskier trades out there to consider stepping into.
Still, one can't help but wonder if this fast-growing entertainment outfit will need to raise a comparable amount of money again in the near future, leading to a similar outcome with its shares. Even after today's exaggerated plunge, for now, this micro cap name should only be considered by investors who can tolerate above-average volatility and risk.
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James Brumley 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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