Why Clearwire's Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of wireless service provider Clearwire (NAS: CLWR) weren't delivering for investors today as they fell as much as 14% in intraday trading after the company announced that it's selling stock.

So what: On Friday, Clearwire issued a press release saying that it plans to start selling up to $300 million of new stock through Cantor Fitzgerald. In its quest to build out its business and network, Clearwire has remained unprofitable and cash flow negative. The company has funded itself through a combination of debt -- it currently carries $4.3 billion in debt on its balance sheet -- and stock sales.

Now what: Shareholders rarely get excited when a company decides to offer new shares because it dilutes the ownership percentage of current shareholders. And for a company like Clearwire, which has a market capitalization of just $650 million, a $300 million stock offering is a very significant one.

The math for investors to think about here, however, is what the long-term value of the new money raised will be. If investors think that management will use the new capital wisely, then it may not be terrible news that the company's selling new shares. A slightly less optimistic twist is that if the company needs the cash to keep the lights on and debt is either not possible or cost prohibitive, then there may be little other choice than to sell new shares.

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