Ideanomics (NASDAQ:IDEX), a serial acquirer of diverse sets of businesses, has risen substantially in the past six months, over 159%. In the past month, IDEX stock shot up to $5.43 per share from $3.16 a month earlier. It has recently settled at $3.85 per share with a market cap of $1.39 billion. However, based on its recent purchases, it is possible IDEX stock has further to go.
When I wrote about Ideanomics last month I focused on the company’s cash uses and sources. It seemed to me that the Chinese company was going to have to raise more cash. This was despite the equity raises it already had done. I estimated that Ideanomics needed to raise at least $60 million.
The Convertible Note
That’s exactly what the company ended up doing. On Feb. 8, Ideanomics said that it had raised $80 million in a convertible debenture. The note pays interest at an annual rate of 4%, but more importantly, it has a conversion feature at the price of $4.95 per share.
Now at the time on Feb. 8, the price was higher than that at $5.43 per share. That means that when the debenture was issued it was already in-the-money. This is very strange. Usually when a convertible note is issued the conversion is at a premium to the then-level of the stock.
Otherwise, it is not fair to other investors since the company is essentially issuing equity with a dividend that other investors can’t have. By issuing the note with a higher than market price conversion feature, the convertible will not be worth the same as the underlying equity.
However, since then IDEX stock has fallen. It must be that management had a good sense that its stock would fall and so they weren’t so concerned about the discount conversion. So as it stands now the conversion price of $4.95 is about 29% above the Feb. 19 price of $3.85 per share.
The point is the company has raised the $80 million or so I suspected it needs to cover its ongoing losses and all the acquisitions it has made recently. To be fair, there has been a lot of financial activity. It will be interesting to see the company’s end of the year and first-quarter financial statements. This will help investors see more clearly where its financial position is really at.
What to Do With IDEX Stock
Of all the acquisitions that the company has made recently, I suspect the most profitable one is the Timios real estate title and escrow company. Ideanomics said that it paid $40 million in cash for the acquisition.
The problem is there is no information on its performance or how much Ideanomics expects to generate in revenue or profits from this company. However, traditionally these kinds of title and escrow companies tend to be quite successful. They charge fees for closing real estate transactions and keeping all the records straight. Their profitability is a function of the growth in the real estate market.
Therefore, I suspect that this company could be a cash cow for Ideanomics going forward. It could help power the cash flow the company is going to need for its adventures in electric vehicles and ride-sharing companies.
The January 2021 presentation on the Ideanomics website says on page 14 that Timios has had a 95% client retention rate in the past 10 years. Moreover, it also says that Timios is producing $60 million in revenue in 2020 and possibly higher.
This is what leads me to suspect that the company is likely to be quite profitable. In fact, on Feb. 19, Timios expanded its operations in California with the addition of three new offices.
If Timios turns out to be the company’s cash cow, then Ideanomics might actually have a chance at serious profits. This is what leads me to believe that IDEX stock could possibly be worth much more.
However, without further financial information, I cannot put together a firm analysis or valuation of IDEX stock. The company is set to release its earnings on March 31. Once we can see what all these acquisitions will turn into, in terms of cash flow, then a more accurate picture of its financial future can be assessed.
On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.