Toxic financing structures are major red flags. IREN/CRWV/SLNH/BKKT have predatory dilution and should be avoided. NBIS has optimal structures. SNAP masks dilution via stock-based comp. Avoid companies with toxic overhang/debt burden.
ATM dilution risk, debt interest burden, float dynamics, stock-based compensation dilution masking real profitability
Sure, #1 thing is toxic financing structure/float dynamics. Best example is current Neoclouds landscape: - $IREN is basically trash, since they have $6,000,000,000 ATMs and virtually infinite dilution, likely selling into every rally (structural overhang) - While $NBIS is now YTD 153%+, from optimal structures (eg. $NVDA direct funding, mix of convertibles, etc.). - On the other hand, $CRWV has endless debt interest given they took out high interest rate loans to finance GPUs. It's extremely nuanced, but you need to take a look at the float dynamics. If they're legitimately a good company, then it might be a good idea to go long after all the existing holders get diluted to oblivion. But if you care about your equity appreciation, it's a good idea to stay far away from toxic financing structures or toxic overhang (eg. debt interest, that eats away at a company FCF long term) With smaller companies, they have this all the time, like $SLNH, where there's new $500m ATMs on a $250m MC. Or like $BKKT where there's endless dilution to fund executive pay. With these companies you're basically transferring your money over to the company while influencers talk about them. So those are red flags. With many software names like $SNAP, they mask stock-based compensation with profitability. So while the company optically looks profitable, you'll likely see the value of your equity decrease due to dilution. There's endless types of these share structures you need to look when screening ideas.
| Horizon | Raw move | vs SPY |
|---|---|---|
| 1 day | +0.0% | +0.0% |
| 1 week | +2.8% | +0.7% |
| 1 month | -32.7% | -33.9% |
| 3 months | — | — |
| 6 months | — | — |