Newsmax (NYSE: NMAX) has been sizzling since completing its initial public offering (IPO) this week. Shares of the conservative news network rocketed over 700% the day it went public, rising from its $10 IPO price to over $80 per share. It continued its epic run on day two, soaring nearly 180% more. Its blistering two-day run has seen the stock leap more than 1,500% to over $233 per share.
If you're like most investors, you want a piece of that price action. However, before you buy Newsmax stock, you need to consider the risks. Here are three warning signs investors must consider to avoid potentially getting burned by this hot stock.
Deep in the red
Many factors can cause a stock to surge following its IPO. However, one catalyst tends to drive its long-term performance: profitability. A company needs to make money to support its operations and growth over the long term. If a company continues to lose money, its stock will likely lose value.
Profits have been elusive for Newsmax. Last year, the company hauled in $171 million in revenue from advertising, subscriptions, affiliate fees, product sales, and other sources. That was up more than 26% from 2023, which is a strong growth rate.
However, Newsmax reported a net loss of $72.2 million last year. That was a more than $30 million increase from its loss in 2023. The company's programming, headcount, and production costs rose as it expanded its platform. Newsmax also paid significant legal fees to settle a lawsuit last year.
Newsmax is burning through cash to fund its operations and expansion. That's leading the company to raise capital from investors. Before completing its IPO, the company raised $225 million in cash from investors via a convertible preferred stock offering. Meanwhile, its IPO raised another $75 million in cash to fund its operations. The company will need to eventually start making money so that it doesn't have to rely on investors to fund its business.
A pricey valuation
The post-IPO surge in Newsmax stock has driven up its valuation. The company recently had a market cap of almost $30 billion. For perspective, that's higher than the roughly $25 billion market caps of Warner Bros. Discovery (NASDAQ: WBD), which owns CNN, and Fox Corp (NASDAQ: FOX)(NASDAQ: FOXA), which owns Fox News.
That's a sky-high valuation for a company that only generated $170 million in revenue last year. For comparison, Warner Bros. Discovery produced nearly $40 billion in revenue last year from its treasure trove of content brands, while Fox's news and sports stations generated nearly $14 billion in revenue. Given their valuations, Warner Bros. Discovery trades at less than 1 times its revenue, while Fox trades at less than 2 times revenue. On the other hand, Newsmax trades at a staggering 100+ times its revenue.
Meanwhile, Warner Bros. Discovery and Fox are highly profitable and generate significant free cash flow. Warner Bros. Discovery produced over $4.4 billion in free cash flow last year, and Fox generated almost $1.4 billion. Contrast that with Newsmax, which burned through over $107 million in cash to support its operating and investing activities.
A wave of dilution is coming
Supply and demand are big factors driving the epic surge in Newsmax's stock price. The company only sold 7.5 million shares via its IPO. Demand from investors has far exceeded the number of publicly available shares, which has driven up the price.
The supply of shares will likely increase sharply in the future. Currently, company executives and insiders can't sell any of their shares to cash in on the rally due to a lockup period following any IPO. These lockups typically last six months. When it expires, you can expect a flood of new shares to hit the market.
On top of that, Newsmax recently completed its $225 million convertible preferred stock offering. Investors can eventually convert these shares into common stock. The company noted that "these shares are converted at a 25% discount to the expected public offering price and will be registered for trading subsequent to the closing of the public offering." Many of these investors will likely cash in on the IPO surge by converting their stock and selling those shares.
Finally, the company will likely continue to burn through cash. Because of that, it will eventually need to raise additional capital from investors. It will likely do that by selling more shares, further increasing the number of shares that trade publicly.
Eventually, Newsmax stock will run out of gas
Newsmax has gone on an amazing run following its IPO. However, there are several warning signs that should give investors caution before jumping into this scorching hot IPO. The company's combination of losses, sky-high valuation, and an eventual surge in new shares could cause the stock to give back a big chunk of its gains. Because of that, you might want to just watch this show from the sidelines to avoid getting burned when that downdraft eventually occurs.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Warner Bros. Discovery. The Motley Fool has a disclosure policy.
