Lizhi (NASDAQ: LIZI) stock will jump 1,000% at the open today. LIZI stock rising 10x should not be taken as a sign that the company’s finally worked out how to make buckets of money. Instead, this is a purely technical change, a nominal change which impacts no real world wallets. Which is a pity of course, we’d all love to see the stock rise nicely but it is still true- this is not a real price rise.
The business line at Lizhi is perfectly respectable: “Lizhi Inc. operates an audio entertainment and social networking platform in the People’s Republic of China. It provides podcasts, live streaming, and audio entertainment products. The company offers LIZHI App, an audio entertainment platform that offers interactive audio experience, as well as audio entertainment content, such as social, talk show, music, ACG, and audio book content; Tiya App, an audio-based social networking product; and LIZHI Podcast, a podcast app to provide curated podcast content.” etc.
Lizhi also does decent enough numbers. Nothing dramatic, but it has real revenues of perhaps $80- $90 million a quarter and a (small) net profit on that. The market cap at $24 million looks a little low in fact for that sort of business. For those sorts of numbers. But the particular problem being solved here isn’t about the overall valuation, it’s about the stock price itself.
Lizhi stock price from Google Finance
The US markets view penny stocks as not being quite right. Not that all are run by charlatans, not at all, but if charlatans and frauds play in the stock markets they do so with penny stocks. Therefore both Nasdaq and the NYSE have $1 minimum bid prices. Remain a penny stock long enough and you’ll lose the quotation. This is therefore a problem that needs to be solved.
The solution is simple enough, just declare that 10 old shares are now one new one. Or, in this case, that the ADS represents 200 shares instead of 20. In effect, a reverse stock split: “LIZHI INC. (LIZI) will effect a one-for-ten (1-10) reverse split of its American Depositary Shares and a ratio change from one (1) ADS representing twenty (20) Ordinary Shares (1:20) to one (1) ADS representing two hundred (200) Ordinary Shares (1:200). The reverse stock split will become effective on Wednesday, September 20, 2023.”
This doesn’t change the overall market capitalisation, just the number of shares that make it up. The stock price therefore reacts mechanically, rising 1,000% or 10x.
This is all a purely technical exercise that doesn’t change the Lizhi value at all - except that by retaining the Nasdaq quotation there’s the prevention of that fall in value that a delisting to the OTC would cause.