I've been thinking about today's action all afternoon. I can only conclude that I don't know if there's a reverse split on the table or not, as there is insufficient information for me to reach that conclusion. However, I was wondering if there was any logical reasoning for doing such a large reverse split at this time and I actually find that there is some valid reasoning to have one, in case the RS proves itself out.
First, normally I find that over 95+% of the time, a reverse split is simply invoked to perpetuate the selling of more shares via additional convertible debt. In those cases, we usually see the 1:1000 reverse split take place at $0.0001, running the price momentarily to a dime, before it starts selling off as the toxic death spiral continues. Sometimes it's because the company is simply in a perpetual financial jam, while other times it seems to be an outright scam to enrich the CEO, the toxic lenders and the naked short sellers.
But something is very different here, or I should say I can at least see a clear logical reason for a reverse split of this magnitude to take place. Taking a look Temu and their $16 billion in annual revenue that I found on some web site, that I think I linked in a previous post, it seemed like the reason for their rapid growth was because of their wealthy parent company, PDD, of whom I speculated was the source of their advertising expenditures, like $2 billion, which is what gave Temu the big push to grow.
When taking a look at JFH, however, I don't see any massive parent company behind then that can help them grow that fast, so a logical approach would be to go the public capital market, raising their advertising money there. If they just were to continue growing organically, I don't see how they could give Temu a run for their money.
If I make the assumption that JFH is doing a mere $100 million in annual revenue based up $1 billion of Gross Merchandise Value that is being turned over on their site, annually, as a guess, then even if JFH could spend 10% of that revenue on advertising for the following year, that would only be $10 million in their advertising budget. That's a far cry from the supposedly billions that Temu could spend via their parent company.
So if takes Temu $2 billion in advertising to generate $16 billion in sales annually, or 12.5%, that's means for every $12.5 spent on advertising, they generation $100 in revenue. But if JFH's advertising budget is only $10 million, that would mean it would only generate $80 million going forward for their next year. How's that going to help them grow rapidly? Well, it's not, at least from a mathematical perspective.
So now let's see why a reverse split does make logical sense, if they took that route. And remember this is purely speculation and not investment advice as I'm not a financial advisor.
Given a 1:1000 reverse split, the Outstanding Share structure would go from 4 billion shares to 4 million shares, certainly not enough liquidity by any means. But the share price would indeed be high enough to justify a move to a higher exchange, if they met additional criteria. More importantly, a capital raise at a higher price, somewhere between $10 and $20 per share, depending up when the RS took effect could give them massive amount of capital to use for advertising... without blowing up the OS.
If they wanted to raise a billion dollars at a penny, they would scale the OS to an additional 100 billion shares! That's not going to work! But if they did a billion dollar capital raise at $10 per share, they would only be adding 100 million shares to the 4 million share OS. That's nothing. Heck, they could do a $4 billion capital raise, ending up with only 404 million outstanding shares. That would work.
And then they would have access to a massive amount of money for advertising, allowing them to compete with the existing top players in the e-commerce space, perhaps allowing them to have billions of dollars in annual revenue. After all, they're not building a product; they're just advertising products from all of their merchants, helping their grow as well,so there's no specific cost of goods sold expense for each product sold, just general business expenses. So, logically, it could work. In fact, it might be the only logical way to make a huge run at the competition.
As such, if the RS proves to be legitimate, it might actually be the best thing that happens, well, unless you can come up with a better way for the company to generate a massive amount profits every year that they can spend on advertising. I mean I guess they could do it slowly and organically but that might take a decade or longer!
So I did not sell any shares today; instead I nearly doubled my position. It doesn't mean I'm correct in my thinking here, it's just the way I decided to play it as I can see a logical reason for a reverse split to take place at this price level, especially considering JFH is supposedly a profitable company and would have no need or reason to go down a toxic death spiral path, since they shouldn't have to.
Okay it's just my opinion; not investment advice; just food for thought before tomorrow's open. I have no idea how it's actually going to play out.
