2 AI Stocks Raise Money

Brit Ryle

Posted February 26, 2024

How to Profit as These Two AI Stocks Raise Money from Wall Street

Two companies on my watch list announced fund-raising moves last week. One announced a secondary offering of stock, one announced a convertible bond sale. Both stocks sold off on the news and are offering investors a nice entry point.

Let’s start with the secondary offering… 

Even though the stock market exists so that companies can raise money, investors often don’t like it when a company sells stock to raise money. There’s the question: “What’s wrong? Why do they need more cash…”

And there’s also the “dilution” problem. When new shares of stock are issued, the divisor for calculating earnings per share (net profit divided by number of shares outstanding equals earning per share) gets bigger. As an owner, your share of earnings gets smaller. This is called dilution – its like adding ice to good scotch.

Plus, since Price-to-Earnings (P/E) ratios are calculated with earnings per share (eps divided by stock price = P/E ratio), dilution literally makes a stock more expensive by raising the P/E ratio. 

Of course, if the company can use the influx of cash to grow revenue and profits, well, that tends to be an acceptable offset to some dilution. 

Now when it comes to a secondary offering, price matters. Because a secondary offering of stock is a block trade – the company hires an investment banker to line up a one-time sale of a block of stock. That puts the buyers in a pretty good position to dictate terms, and demand a discount to the current market price of the stock.

Symbotic (NASDAQ: SYM) 

There’s a well-established pattern for secondary offerings. First the secondary is announced and the stock price falls. Then the pricing of the secondary is announced and the stock price adjusts to near the offering price. The stock remains at the offering until it is completed, and then the stock often rallies. 

Symbotic provides AI driven software and robotics that automate the unpacking and repacking of pallets at distribution centers. So when a Duke’s mayonnaise truck comes to a distribution center, Symbotic powered robots unload and unpack pallets of mayonnaise, store them and then repack pallets with mayonnaise and other goods with the same ultimate destination, and send them on their way. (Videos of the system in action are pretty impressive https://www.symbotic.com/symbotic-system/how-it-works/).

Symbotic is expected to grow revenue from $1.74 billion in fiscal 2024 (which ends June 1) to $2.48 billion in fiscal 2025. That’s pretty good, it should be turning a $0.53 share profit next year too. 

Right now, 88% of revenue comes from Walmart, (NYSE: WMT), who also owns 11% of the company. Other major customers are Albertsons (NYSE: ACI) and Target (NYSE: TGT). Symbotic has 15 systems up and running, and 37 more in various stages of deployment. Backlog stands at $23 billion.

Last Wednesday, February 21, at 4 pm, Symbotic announced a 10 million share stock offering. Four hours later, at 8 pm, another press release revealed the pricing: $40.50 a share.  

That’s as quick a turnaround from announcing a secondary to pricing one as I’ve ever seen. The stock closed at $39.68 the next day, which was Thursday. It closed at $40.40 on Friday.

Over the last year, Symbotic has traded as low as $14 and as high as $64. $40 looks like a good entry point. 

Super Micro Convertible

I started in this business in 1998 – just as the internet bubble was kicking into overdrive. And I get that there are some similarities with what is happening with AI stocks right now. When you see a stock like Super Micro Computer (NASDAQ: SMCI) run from $326 to $1,077 in a month, the bubble calls are inevitable.

But there’s also one huge difference between what’s happening now and the internet bubble  – profitability. 

Most of the stocks driving the AI bull market are very profitable. Take Super Micro, for instance…

Super Micro makes the Nvidia-powered servers that are transforming data centers like Amazon Web Services and Microsoft’s Azure

One month ago, analysts thought Super Micro would earn $4.55 a share for the first quarter, which ends in March. Today, the estimate is $5.72 a share. Full year 2024 earnings estimates have jumped from $18.39 to $21.89. And next year? Expectations have gone from $20.90 a share to $29.39. This revision happened in just 30 days. 

That is an incredible change in a very short period of time. 

At Friday’s closing price, Super Micro is trading with a forward P/E of about 30. For a company with 100% growth in 2024, and 50% coming for 2025, that’s not ridiculous. 

Super Micro has $325 million net cash. And on February 21, it announced a convertible bond offering to raise $1.5 billion.

Now, a convertible bond is a bond that can be converted into stock under certain conditions. Typically the bond holder gets paid interest while waiting for the opportunity to convert the bond into stock. 

Well, get this: Super Micro announced that it won’t be paying any interest on these bonds. Zero. And, the stock price at which the bond holders can convert to stock is $1,375! 

Super Micro closed Friday at $860 a share. 

No interest and a conversion price that’s 59% higher than Friday’s close. Sounds like the investors who buy these bonds expect a lot of upside…

For your profits,

Brit Ryle
Pro Trader Today