On June 21, 2017, the market received a press release from Function(x) Inc. (FNCX), wherein the following statement was included:
“Function(x) Inc. (NASDAQ: FNCX) (the “Company”) today announced that it has determined to accept the Nasdaq Listing Qualifications Staff’s determination to delist the Company’s securities from Nasdaq. As a result, trading in the Company’s common stock will be suspended on Nasdaq effective with the open of business on Thursday, June 22, 2017.” Source
On receiving the news, the market participants pushed down the share price. The share price went from $0.50 to the level of $0.21 in just two days. Have a look:
Two questions arise here. Whether the share price move is justified? Whether it represents an opportunity for new market participants? In this piece, we will endeavor to answer these questions.
Function(x) is the owner of digital media platforms. It is intended to become a leading player in the interactive media publishing by focusing on video, social, mobile, e-commerce, and predictive analytics. The following media companies are owned by FNCX.
The company stated in its last annual report that the company’s strategy is divided into three main pillars: “connecting content owners with their audience, built-in monetization model for content contributors and distribution partners,” and developing a technology driven platform to increase engagement. Additionally, it is stated that the company will also grow via acquisitions. For instance, Wetpaint and Rant assets were actually acquired.
Delisting – What happens now?
On June 1, 2017, the company put out that NASDAQ had notified that the company had not uploaded its last 10-Q for the period ending March 31, 2017, so its stock may be delisted. The company responded by noting that it will present its plan to file the Form 10-Q (quarterly earnings) in a hearing with the NASDAQ, and request a further extension to do so. FNCX did not release any new information about this matter. Also, it did not release the quarterly earnings. Finally, on June 21, 2017, it noted in this press release that the stock was about to be delisted on June 22, 2017:
“Immediately following the suspension of trading on Nasdaq, the Company expects its common stock to be quoted on the OTC Pink market electronic quotation service operated by OTC Markets Group Inc. The Company’s common stock will continue to trade under the symbol FNCX. ( OTC PINK : FNCX )” Source
Being delisted because the company is not filing its quarterly earnings created a very bad impression on market participants. They should be thinking that the company does not want to disclose some bad numbers. That is the reason to explain the recent decline.
However, the market usually overreact on bad news
Empirical research shows that the market participants tend to overreact to bad events. Professor Werner F. M published several documents about this fact. You can check it here. This is some information about his academic work:
“Research in experimental psychology suggests that, in violation of Bayes’ rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered.” Source: Journal of Finance
What does it mean? It means that academic research shows that FNCX probably overreacted to the delisting announcement. Hence, we may see a recovery once the company releases its quarterly results. So, stay alert regarding the company news. It does not make any sense that the company shares were valued about $2 in February 2017, and now shareholders are only receiving $0.21. The value destruction cannot be justified by any press release.
Financial statements and conclusion
In the last quarterly results, the financial situation of the company was not so bad. How can things change so much in only a three-months-period? Have a look. These are the assets reported as of December 31, 2016 and the previous quarters:
|Current Assets (All numbers in thousands)|
|Cash And Cash Equivalents||122||827||537||623|
|Short Term Investments||–||–||2,495||3,145|
|Other Current Assets||271||87||375||2,969|
|Total Current Assets||1,185||1,424||3,828||7,078|
|Long Term Investments||–||–||–||–|
|Property Plant and Equipment||1,260||1,337||1,414||1,829|
|Deferred Long Term Asset Charges||–||–||–||–|
These are the liabilities:
|Accounts Payable (All numbers in thousands)||8,901||9,484||11,625||10,204|
|Short/Current Long Term Debt||10,794||8,853||8,996||7,216|
|Other Current Liabilities||3,385||5,012||3,488||6,579|
|Total Current Liabilities||23,080||23,349||24,109||23,999|
|Long Term Debt||–||–||19,716||19,666|
|Deferred Long Term Liability Charges||3,548||3,229||3,429||3,479|
FNCX could not deliver its next quarterly earnings on time and NASDAQ punished the company by delisting the stock. Market participants believed that the company did not want to release bad financial figures and pushed down the share price. Is this justified? We saw that academic research shows that the market usually overreact to these types of dramatic events. In our opinion, the company needs to release the 10-Q soon. Once this happens, the share price may rebound. We checked the previous financial figures and the situation was not as bad as the market is discounting. To sum up, stay alert as FNCX is sure to deliver some positive news shortly.
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Image courtesy of Flickr
Disclosure: We have no position in FNCX and have not been compensated for this article.