AST SpaceMobile’s announced stock offerings already promise dilution of 17.5% — and this is only the beginning.
After going from $5 a share at the start of the year to less than half that by May to an all-time high north of $38 a share back in August, would-be satellite communications stock AST SpaceMobile (ASTS 11.35%) has taken its shareholders on a wild, wild ride in 2024.
But buckle up, investors: This ride is far from over and it could get even bumpier in the quarters to come.
Marvel at AST’s amazingly big bank account
By now you’ve likely heard the news. Two weeks ago, AST SpaceMobile management informed investors that it plans to “redeem all of its publicly traded warrants to purchase shares of Class A common stock.” One week later, AST advised that it has already received $71 million from this warrant redemption, and anticipates collecting $84 million more.
The $155 million in new cash will swell AST’s coffers to $440 million and, with payment already made on the company’s first five BlueBird communications satellites (which launched on Thursday), the company says it now has (or will soon have) sufficient funds to support its “near-term operational initiatives,” to pay interest on its debt, and even to begin paying down some of its senior secured credit facility.
Or not.
After announcing the warrant redemption two weeks ago where management disclaimed having any plans “to raise capital in an underwritten public equity offering through at least the end of 2024,” AST this week made a curious follow-up declaration. AST now says it is planning to sell stock — $400 million worth — and has filed an SEC prospectus in preparation for making such a stock offering.
AST sends mixed signals
To be clear, I don’t necessarily think this is a bad idea. Earlier this month I made the case that AST SpaceMobile actually should be selling stock. Indeed, I argued that because building out a 168-satellite constellation is probably going to cost AST $3 billion or more, and because the company’s stock price has rocketed so high already, the logical thing to do now is sell a lot more stock at today’s high price, before it has a chance to go lower.
A sizable stock offering of 100 million shares, for example (AST already has 158 million shares outstanding) should suffice to raise all the cash the space company will need to build and launch its entire constellation of communications satellites, as currently envisioned. In contrast, by the company’s own admission, a sale of $400 million worth of stock will only cover the costs of about 20 more Block 2 BlueBird satellites.
So why isn’t AST going this route? Why is it selling shares only in drips and drabs? (A strategy I specifically warned against before?)
Danger ahead: Stock dilution
I can only imagine that management has decided its investors will revolt if they see AST issuing too many new shares, and diluting their ownership stakes in AST SpaceMobile too fast. But here’s the thing: Even spaced out a bit like AST is doing, the dilution will be significant.
Start with the “warrant redemption” announced last month. As fellow Fool contributor John Rosevear explained in a similar situation with a different SPAC company — Nikola — a few years ago, a warrant redemption works like this:
When going public, a SPAC company entices investors to participate in its initial public offering by offering cheap warrants to buy shares at a set price, so as to profit if the stock is selling for more than that price. In AST’s case, warrant holders will be paying $11.50 to exercise their warrants, and will receive shares worth nearly $28 each, at last report, in exchange.
Warrant owners also have the option of just selling their warrants back to AST for $0.01 per warrant. But that’s an option no one in their right mind would choose. Thus, we can calculate with virtual certainty that if AST expects to raise $155 million from its warrant redemption, it must also expect to issue ($155 million-divided-by-$11.50-equals) 13.5 million new shares as part of the redemption.
Next, let’s look at the plan to sell $400 million AST shares on the open market. AST’s current share price of $28 or so implies that this stock offering will necessitate the creation of 14.3 million more shares. So add up the issuances, and AST shareholders are already looking at 27.8 million shares worth of stock dilution, just from the issuances already announced.
What it means for investors
Added to a 158 million share count, that works out to AST investors being diluted by 17.5%, just from these two announcements — which may help to explain why the stock price is down nearly 28% from its high last month, as investors start to make their displeasure known.
The truth of the matter, though, is that AST must dilute if it’s to raise the cash it needs to succeed. New investors need to be aware of that before investing in AST stock. They also need to be aware that this is only the start of the dilution. There’s sure to be more on the way.