Shares of Nikola (NASDAQ:NKLA) are feeling the heat on Wednesday, down 7% on the day. It’s not so much the percentage decline — NKLA stock has seen much worse — but where the stock is trading at at this moment.
Nikola stock is on the verge of closing below $5 for the first time. It’s also hitting a new all-time low in today’s action, as it takes out the May 12 low of $4.82. As if navigating through a bear market isn’t hard enough, Nikola faces a specific hurdle on Wednesday.
Today is the deadline for shareholders to vote on the company’s Proposal 2. With only 33 million shares currently available to the company, Nikola hopes to increase its common stock authorization to 800 million shares, up from its current 600 million.
“Approximately 567 million [shares] are either issued or reserved/unissued or spoken for, leaving us with 33 million shares available for other purposes. That is why we are urging ALL stockholders to vote NOW for Proposal 2…”
Perhaps not surprisingly, Nikola founder Trevor Milton voted against increasing the share account. However, Milton’s vote may not be in the best interest of the company or its shareholders.
Dilution Dilemma for NKLA Stock
Milton previously lied about Nikola’s progress both before and after the company went public. In turn, he is awaiting trial in July for federal fraud charges. Further, the company is seeking to recoup the $125 million fine it was forced to pay to the U.S. Securities and Exchange Commission for Milton’s actions.
There’s clearly a bit of animosity between the two parties. Despite that, Milton is one of the largest shareholders of Nikola and likely doesn’t want to lose any voting power. That’s almost surely going to happen if the company increases its share count.
At the heart of any stock-issuing argument is dilution. When a company authorizes more shares, it devalues — or dilutes — the existing shares. From a fundamental supply/demand perspective, it has to though. If NKLA stock goes from 600 million shares to 800 million shares — a 33% increase — then the value of those existing shares decreases, provided the value of the company stays the same.
While it may not always be attractive for investors, sometimes this dilution is necessary for a company’s survival.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.