Is red-hot Intuitive Machines (NASDAQ: LUNR) stock finally starting to cool off?
Shares of the space stock roughly doubled in price over the six weeks between mid-December and late January, eventually hitting an intraday high of $24.95 on Friday, Jan. 24. As January has turned into February, however, the stock has given back much of its gains. Friday last week, for example, the stock closed at just $18.40, down 26% from its recent high.
Why? In part, I suspect we’re seeing the what happens when reality catches up to irrational exuberance over a momentum stock. But in part, I fear Intuitive Machines is itself to blame for its stock price rollback. On Feb. 4, Intuitive Machines announced that it is redeeming its warrants.
Let’s start with a definition of stock warrants, and what it means to “redeem” stock warrants.
When a private company decides to go public by merging with a publicly traded special purpose acquisition company in a SPAC IPO, as Intuitive Machines did back in 2023, it often provides investors an incentive to entice them to buy shares. Specifically, it will sweeten the deal by giving buyers the right to purchase additional shares of the company post-IPO at a specified strike price.
This right is called a “warrant,” and in Intuitive Machines’ case, the warrants it sold at its IPO entitled investors to buy shares of Intuitive Machines stock for $11.50 (under the condition that the company’s stock sold for at least $18 for 20 days straight before the offer to redeem was made, a condition that has now been fulfilled).
These warrants have become increasingly valuable to investors as Intuitive Machines stock surged to prices far in excess of the $11.50 strike price. However, the warrants also hold the potential to dilute Intuitive’s share count once they’re exercised, and force the company to issue new shares in exchange for the warrants.
To remove uncertainty about the size of its future share count, Intuitive Machines announced last week that it is exercising its own right to buy back the warrants — to “redeem” them, or hold a “warrant redemption.”
Although the warrants are very valuable if exercised right now, Intuitive Machines has valued them, unexercised, at just $0.01 each, which is the price it’s offering to pay. So buying back the warrants would be all but free for the company.
Investors aren’t likely to think that’s a great deal, however. Logically, they’re going to exercise all their warrants (i.e., trading in their warrants, plus $11.50 each, in exchange for new Intuitive Machines shares) before the deadline for redemption.