GD Culture Group (NASDAQ: GDC) recently issued new stock to raise capital. Nothing wrong with that, that's what stock markets are for, to feed our capital into businesses that will then show us a profit. From the point of view of the business stock markets are where capital comes from to finance their business. There can be unfortunate events though, as with what has recently happened with GDC. They raised money - the corporation is now worth less than the money they raised. So, a useful stab at a valuation of the business itself is that it's negative. This might be unkind and it's certainly a little extreme but it also has more than a fragment of truth to it.
As we've said before about GD Culture there's been a boom in meme stocks associated with small cap Chinese and Far East financial stocks. Well, these things happen, something like the AMTD twins performance just makes everyone look at that sector as being a potential gold mine. This does also mean that while there may, or may not, be some gold mines to be found among such stocks there will be many more claims that there are gold mines out there than there are actual ones. That's just how markets work - some sector is deemed hot and therefore we get booming stock prices for no or little reason.
GD Culture share price from NASDAQ
As we say, these things happen. As above we can see that this happened to GDC stock - that vast boom was actually a 1600% intraday rise. Well, OK, fads and fashions happen we might say. Except that it was just - exactly - coincident with that boom in the price that GD Culture raised more capital by issuing new stock. They raised $9.55 million in fact. Which is pretty good because before the stock price surge they were worth about $8 million. And now, after the stock price has fallen back again, the market capitalisation is back at $8 million or so. That is, the entire company is currently valued at less than the new cash they just raised.
One possible view of this is that it sure is lucky they raised money just as the stock price peaked. Another is that what would any rational management do? Being able to raise more new cash than the entire value of the company a week earlier is not a common occurrence - take advantage while you can.
The real lesson for us out here is that perhaps we shouldn't get so excited about small caps and soaring stock prices. Sure, GDC was fun to ride on the way up but it's been value destruction ever since.