News of it obtaining regulatory approval for its flagship product has sent Second Sight (NASDAQ:EYES) stock to the moon. Where’s this retinal health play headed from here? That’s the question on the minds of investors, who likely weren’t aware of this company before its game-changing news.
After surging from under $2 per share to prices over $10 per share, you may feel tempted to dive into shares, especially as it retreats closer to $8, but a little caution may be warranted.
The prospects for its Argus 2s Retinal Prosthesis System may have improved materially, but that’s no guarantee shares will make another triple-digit move.
Investors are likely to continue selling the news assuming meme stock mania doesn’t come back for yet another round, This may point to a move back to mid-single digits for the stock. Once this happens, it may be a risk worth taking.
Diving into the details, there’s a lot more going on than recent headlines suggest. Taking your time looks to be the best move.
There’s More to EYES Stock Than Just Its Recent FDA News
Much of the discussion with Second Sight has been about how its prosthesis product can help those with severe retinitis pigmentosa. While the news of the product obtaining Food and Drug Administration (FDA) approval is important, there’s much more at play here with this company.
Before this news, the latest with EYES stock has been the pending business combination with French vision health company Pixium Vision. The deal, which is not a full-on merger, will give Pixium a controlling interest in the company.
The recent FDA news hasn’t resulted in any changes to the deal. It will still be under the terms announced back in January.
However, this business combination could affect whether this newly-approved product even gets produced. The newly-combined entity may decide to ahead with bringing the product to market. Or, it may wind up adapting it for use with Second Sight’s existing Orion platform.
In short, it’s still unclear how much the approval of Argus 2s improves things for EYES stock. As more information comes out, investors could continue to re-assess its current valuation.
Possible Dilution Ahead
In conjunction with the Pixium Deal, Second Sight also plans to conduct a $25 million capital raise. This financing will help get the company on better financial footing. It makes sense why EYES was a penny stock, until recently.
Generating less than $500,000 in revenue last year, it’s been burning through cash. Its current war chest ($3.2 million as of Dec 31) is far from enough to keep the lights on.
Unfortunately, this capital raise will mean shareholder dilution. With the stock at double-digit prices, and its current market capitalization standing at nearly $300 million, raising $25 million isn’t going to do much in the dilution department.
Yet, it’s still a factor that could downward pressure on the stock. Especially, if following the recent news, the company doesn’t come out with subsequent game-changing developments.
Also, while meme stock madness among Reddit investors may help to keep the stock elevated for now, what happens if the current enthusiasm for speculative biotech stocks fades from here?
Even if things remain good for Second Sight, the stock could experience a pullback if we see an across-the-board correction for this sector. So, how low could EYES stock go, if investors decide to cash out their fast gains?
I wouldn’t worry about a move back to below $2 per share. The Argus 2s catalyst may be enough to keep shares at prices above prior levels even if it winds up not changing the company’s fortunes in the long-run.
Take off the Rose-Colored Glasses
After a year of near-zero revenue, and significant cash burn, the FDA news is definitely a welcome development. The stock’s epic upward move was partially justified. Diving into the details of this news, it may be wise to take off the rose-colored glasses and conduct some more research.
It’s still early to tell whether this company will see big financial success from this product. It’s even questionable whether this product will be released in its current form or if it’ll be adapted into the existing Orion system.
Add in the pending capital raise, and dilution concerns are on the table as well. Speculative mania over low-priced stocks may help it hold onto most of its gains. But, we could still see EYES stock fall to lower prices. Wait for a bigger dip before buying.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.