Dilution is a powerful weapon in the stock market and the dilution of HMNY is wreaking havoc on the share price. Dilution is legal and you don’t always see it coming. MoviePass parent HMNY is a prime example of what dilution can do to a company’s stock price. The other week when HMNY dropped below $0.10 per share the data being provided was there was only 1.7 million shares available, at a price of $0.06, the market cap (or valuation) was around $100,000. That’s it! The price of a high end car.
Most penny stocks have valuations of more than $1 million. The fact that only 1.7 million shares were available was what brought my attention to this stock and what made me think it was a good buy. Since then the company has released more data including the very useful share count; remember, we thought it was 1.7 million.
On 8/15 HMNY released a report, you can read it here. They went from 1.7 million shares outstanding to 636.9 million shares! You can do the math but I’ll save you the time. That’s a 37,365% increase in shares! Let that sink in, over 37,000%!
I strongly believe that much of the way we look at economics is fundamentally flawed. However, that is another discussion for another day. The basic underlying principles of supply and demand are, from everything we can tell, accurate. So for this post, we will assume that the laws of supply and demand as you learned them in high school are unchanged.
More buyers than sellers, in other words, more demand than supply will push the price of a good up.
More Sellers than buyers, or more supply than demand will push the price of a good lower.
Let’s consider some real world examples. When a sports team makes the playoffs, the tickets typically sell out very quickly. The demand for tickets many times vastly outweighs the supply. This drives the price of the tickets up. If you want to see the game and you didn’t get tickets from the box office before they sold out, you will have to purchase from someone else on Craigslist or StubHub and pay more than the original price. The demand is higher than the supply so the price goes up. This demand can cause a $300 ticket to sell for over $1,000.
When supply exceeds demand, the price will drop. Consider a pair of designer jeans, bought new from a department store they might cost $250 or more. At the end of the season the leftover inventory will go to discount retails like TJ Maxx, Ross or outlet stores. The surplus supply of jeans is sold at a discount, usually under $100. This surplus supply will drive the price down.
Supply & Demand and the Stock Market
Stocks are just like everything else that we buy and sell, the same rules of economics apply to them in real time. More demand will drive prices up, more supply will drive prices down. Typically, most big companies we hear about don’t buyback or sell more shares. But this problem plagues many penny stocks. One of the biggest reasons people don’t trust penny stocks is because the owners of the company can dilute the share holders by supplying too many shares to the market. This will eventually drive the price down.
Companies sell shares to raise cash to make investments or cover operating expenses. HMNY is burning cash much faster than they are bringing it in. With the unstable business model it is unlikely they will be able to get a loan to help them stay afloat. They have shares of their own stock and they are selling them as fast as they can. This is how the supply went from 1.7 million to 636.9 million in just a few weeks. HMNY sold 635.2 million shares to help cover operating expenses.
This selling “diluted” the market and made the existing shares less valuable, just like the designer jeans. The last few weeks as tens of thousands of traders and investors rushed in to buy up what looked like discount shares, HMNY was selling them as fast as they could, which kept the price from rising and actually pushed the price lower.
The Dilution of HMNY
The management at HMNY diluted the shareholders’ current stake and made everyone’s shares worth less. However, if they did not sell these shares they could become insolvent which would make their shares worthless, truly worthless, $0.000000.
When I decided to buy some shares it was truly a gamble. I might lose the entire amount I invested or I might make a handsome profit. No one knows for sure, anyone that tells you different is lying to you. This stock is a gamble plain and simple. With BIG risk can come BIG REWARDS!
Thanks for reading and happy trading! If you have any questions please post them below. Don’t forget to follow me on Twitter for all trades live!