Almost a month ago, I discussed five names that I thought would benefit from raising funds by selling shares of stock. These names had a variety of issues, including poor balance sheets, competitive fears and inflated valuations. In the article, I discussed the reasons why these names need the money, how much I thought they should raise, and how much investors would be diluted. Well, one of the names on the list recently announced an offering. Today, I'll break down the latest news, and provide some updates on the other four names and why they may be next.
The internet radio name became the first on my list to raise some cash. Monday afternoon, the company announced a two part offering. The company will issue 10 million new shares and sell 4 million on behalf of venture capital firm Crosslink Capital. Crosslink will still own 25 million shares after the deal, and underwriters will have the opportunity to purchase an additional 2.1 million shares. The company will raise more than $200 million in this deal.
I had said in my original article that Pandora should raise $70 million from the sale of 4 million shares. Obviously, this offering is a lot larger than that, so the company is raising a large chunk of cash. Pandora shares have also rallied since my original article, which means that my 4 million shares number would have raised even more than $70 million. At the end of its July-ending quarter, the company had roughly $69 million in cash and investments on the balance sheet. This will really help strengthen the balance sheet, and the following table shows how it has weakened in the past few years.
*Liabilities to assets ratio.
As most companies do, Pandora stated that the company would use the funds for "general corporate purposes, including working capital and capital expenditures, along with possible acquisitions." There have been a number of concerns over Apple's (AAPL) new radio service being a Pandora killer, so this money could help Pandora strengthen its business. It also will help the balance sheet, and I wouldn't be surprised if it paid back that $10 million in debt taken out recently. I also think it could use the money for a new marketing campaign, including some TV commercials. Maybe a Super Bowl commercial a couple of months from now would be a good idea too.
Dendreon management needs to step up here in my opinion. I recently discussed a major catalyst for the company, getting marketing authorization for Provenge in Europe. While Dendreon probably still needs a partner in Europe, and many questions need to be answered, this is positive news for Dendreon. We don't know yet when revenues will start, and we know that Dendreon will continue to lose huge sums of money and burn through cash for quite some time.
However, this positive piece of news has pushed Dendreon shares higher. This is probably partly due to some sellers covering because the end of August update had more than 54 million shares short. That's a large short count when stacked up against a float of 148 million. Further short covering could push the name a little higher.
That's why it is the perfect time for Dendreon to raise some cash. When I wrote my original article, Dendreon shares last closed at $2.91, and they dropped to a 52-week low of $2.69 shortly thereafter. On Wednesday, shares closed at $3.24. While Dendreon won't get $4 or $5 for shares like they could have a few months ago, they should consider raising cash at some point to strengthen the balance sheet. Thanks to the recent stock price rise and the positive Europe news, I don't think the raise will be as dilutive. I originally called for Dendreon to raise $75 million with 30 million shares ($2.50 a share). Currently, I think they could probably do $75 million with about 27.3 million shares ($2.75 a share).
Amazon, like Dendreon and Pandora above, has also seen its stock rise since my original article. I had suggested that Amazon could fetch $2.75 billion for 10 million shares ($275), but now I think it could probably get $290 or $295. Given that Amazon had 457 million shares outstanding at the end of their latest quarter, 10 million shares is very little dilution. It could probably sell 15 or 20 million shares for that price and get even more cash if it wanted.
$150 million more than a month ago doesn't seem like much, but it certainly could buy Amazon some extra content for its Prime platform, which competes with the next name on my list. Adding some more original content or buying some older, packaged content would make Amazon more competitive. It also could use the money to increase its fulfillment center presence, which it is already doing. Amazon, like other online retailers, is moving to a same-day delivery model, and it wants to increase its fulfillment center coverage. Some extra money in its pockets from an equity raise would help achieve that goal a little faster.
Like many of the other names on this list, Netflix has seen its stock rise nicely since my original article, going from $278 to $307. I had thought that Netflix could raise $1 billion by selling 3.85 million shares, based on a price of $260. Given the recent rise, I think Netflix could probably net $280 for shares, which would mean just 3.57 million shares.
Netflix needs the money to purchase content, whether it be bundled content or to fund its slate of original programming. Netflix has roughly $4 billion in off balance sheet liabilities, and those will eventually become due. Netflix does need to shore up its balance sheet a little. The other reason I said that a fund raise would help is because the other way Netflix could raise money, in a sense, would be to raise the price of its service. While this would add to the bottom line, it would chase some subscribers away, and we could see a smaller scale repeat of the 2011 fiasco. There are many who believe Netflix is extremely overvalued, with the average analyst price target at $231, so maybe this is the perfect time to raise money.
Tesla Motors (TSLA):
Tesla is up a couple of dollars since my original article, but percentage wise the gain is not as great as some of the other names on my list. I still think that 5 million shares at $150 (we are now at $166) is still a good estimate for what it should raise. The analyst average price target is $154, so this would be right around there.
As I discussed in the original article, Tesla could use the money for a couple of items. First, it can reduce its debt. Second, it can use the money for future growth of the business. A lot of investors have said that Tesla shares are overvalued, so they'd like to see the company cash out in a sense while shares are up.
It's only been a couple of weeks, but one of the names on my list already has raised funds. Pandora has sold shares in a much larger deal than I thought, and the stock has responded nicely. The added cash will help shore up its balance sheet and help potentially fend off Apple. I've highlighted four other names that could potentially be next in the share sale game. The question is who will be next? I look forward to your thoughts.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.