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ACV Tech Falls 29% Premarket Because It Will Rise 1,500% Monday – What?

Tim Worstall
Tim Worstall trader
Updated 30 Sep 2022

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Key points:

  • AVCT stock is likely to rise 1,500% on Monday
  • This news has been greeted with a 29% fall in the stock price today
  • This all seems rather perverse, so why?

American Virtual Cloud Technologies (NASDAQ: AVCT) stock has achieved a rare treat here. AVCT stock is down 29% premarket because it has just announced that on Monday the stock will rise by 1,500%. This is not, to put it mildly, quite what we might expect from such an announcement. Worse, the near 30% fall today is a real fall in value, that 1,500% rise on Monday will be a purely nominal rise. The difference between real and nominal being that the former hits our wallets, the latter doesn't. Or at least, shouldn't, not directly.

As to what AVCT does as we've discussed before it's a possible layer in varied cloud stacks. A management tool to enable those running cloud based computer systems to manage such networks efficiently. We could think that this is a booming business and as a sector it is. But then it's also true that a small company like AVCT is up against the majors here, Google, Microsoft and Amazon. An independent product has to be really very good to make headway there.

There have been various rallies in American Virtual Cloud stock over time but the general performance has been pretty dismal – down 89% over the past 12 months. This leads to a problem that has to be solved – being below the NASDAQ $1 minimum offer price. That does have to be solved or the NASDAQ listing will be lost and AVCT will be relegated to the OTC markets – lower liquidity and more difficult to raise capital.

American Virtual Cloud Technologies stock price
American Virtual Cloud Technologies stock price from IG

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As to why this is purely fashion on the part of the American markets. A “good” stock is, in the folk mind, priced between $10 and $100. That this is purely fashion is shown by London using £1 to £10 for the same range. That's why ADRs of London stocks are so often 10 pieces – to be in that “right” range in both markets.

There's a follow on to this. New York thinks that penny stocks are somehow the preserve of charlatans and rogues. Therefore a sub-$1 stock price eventually loses its listing on the major markets – NYSE or NASDAQ. This means relegation down to the OTC markets where there's less liquidity and capital raising is more difficult.

To avoid this fate have a reverse stock split – which is what American Virtual announced last night and comes into effect on Monday. What used to be 15 pieces of stock will now be one. This should, on a theoretical basis, mean a 1,500% rise in the AVCT stock price on Monday. On a more practical, real price, basis this should also mean a perhaps small uptick in the AVCT real stock price. Because that risk of losing the NASDAQ listing is now gone.

This isn't, as we can see, what has happened. Instead, on the announcement, AVCT is down 29%. Possibly because folk were hoping for the solution to be a real change in the business rather than a change in the stock number denominator. But the end effect is that interesting one – the AVCT stock price is down 29% today because it will rise 1,500% on Monday.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.