Lizhi (NASDAQ: LIZI) stock is set to experience a significant jump of 1,000% at the opening of the market today. However, it's important to note that this increase in stock price does not indicate a sudden surge in the company's profitability. Instead, it is a technical change that has no real impact on the company's financial performance. While it would be exciting to see the stock rise substantially, it's crucial to understand that this is not a genuine price increase.
Lizhi Inc. operates a reputable audio entertainment and social networking platform in the People's Republic of China. The company offers various products and services, including podcasts, live streaming, and audio entertainment content. Their platforms, such as LIZHI App, Tiya App, and LIZHI Podcast, provide users with interactive audio experiences and a wide range of content, including social, talk shows, music, ACG, and audio books.
Despite not being a high-growth company, Lizhi still generates respectable revenues, estimated to be around $80-$90 million per quarter, and manages to achieve a small net profit. Given these figures, the market capitalization of $24 million seems relatively low for a business of this nature. However, the current issue at hand is not about the overall valuation of the company but rather the stock price itself.
In the US stock markets, penny stocks are generally viewed with skepticism. Although not all penny stocks are associated with fraud or deceit, they are often associated with such activities. Therefore, both Nasdaq and the NYSE have set a minimum bid price of $1 to ensure the integrity of the market. If a stock remains a penny stock for an extended period, it risks losing its quotation on these exchanges. This is the problem that needs to be addressed in the case of Lizhi.
The solution is relatively simple: execute a reverse stock split. In this case, 10 old shares will be consolidated into one new share, or in the case of Lizhi, each American Depositary Share (ADS) will represent 200 ordinary shares instead of 20. This reverse stock split will become effective on Wednesday, September 20, 2023, as announced by the company. As a result of this technical adjustment, the stock price will mechanically rise by 1,000% or 10 times its previous value.
It is important to emphasize that this reverse stock split does not alter the overall market capitalization of Lizhi. It simply changes the number of shares outstanding. The purpose of this exercise is to prevent the stock from being considered a penny stock and potentially facing delisting to the OTC market, which could lead to a significant decline in its value.