Troika Media Group (NASDAQ:TRKA) has been a popular meme stock so far in 2023. Even after tanking following a short squeeze in early March, TRKA stock remains up by more than 135% year-to-date.
What makes shares in this marketing company stand out among meme stocks goes beyond just the fact it has been a strong performer. While up by triple-digits, TRKA sports an extremely low valuation. According to Seeking Alpha, shares trade for just 6.6 times analyst earnings estimates for the current fiscal year (ending June 2023).
With this, it’s not just Reddit traders that may be interested in adding Troika to their portfolios. Those who follow a value investing philosophy may find it to be an appealing opportunity at first glance as well.
But given how so many “deep value” names can wind up being “value traps,” let’s take a closer look at the situation with Troika.
Why TRKA Stock is So Cheap
It is wise to be suspicious about stocks that trade at extremely low valuations. Although the market can sometimes be inefficient, especially with smaller, under-the-radar stocks, very rarely do you encounter situations where you can buy a stock at a deeply-discounted valuation with little risk.
So, what does this have to do with TRKA stock? The market has a good reason for giving this stock such a low valuation. Mostly, due to one major red flag. As InvestorPlace’s Thomas Yeung discussed back on March 20, along with its latest financial results, the company disclosed that its share count had increased by more than five-fold.
This was the result of a creditor exercising warrants to buy hundreds of millions of additional shares. The disclosure of this dilution likely was a factor in bringing TRKA’s short-squeeze rally to a screeching halt. While dilution itself is not always a red flag, severely diluting existing shareholders, then waiting as long as possible before telling them, is not a good look.
Worse yet, although it may appear that the impact of this dilution is now fully reflected, with the stock’s move back to 25 cents per share, that may not be the case. Here’s why.
A Big Caveat
For the six month period ending Dec. 31, 2022, Troika Media Group reported a strong improvement in its operating performance on an adjusted EBITDA basis. It’s unclear whether the company will report similarly strong results in the quarters ahead. Yet if this ends up happening, it will give credence to arguments that the stock has become overlooked and oversold.
Yet while TRKA stock may be undervalued, based on the potential value of its underlying business, there is a big caveat when it comes to the merits of buying shares today, even at their current discounted price.
As InvestorPlace’s Josh Enomoto wrote earlier this week, additional dilution appears likely. This is based on the company’s recent filing of a shelf registration statement with the Securities and Exchange Commission (or SEC). Sure, filing this statement doesn’t automatically mean that another five-fold jump in the share count is just around the corner.
Still, this clearly underscores that management is willing to continue using this financing method, with little regard to its impact on outside shareholders. In turn, this suggests a slim chance that the gap between TRKA’s stock price, and the value of its underlying business will ever be bridged.
The Verdict
Taking into account the dilution factor, when it comes to the question as to whether Troika Media Group is a strong deep value opportunity or a value trap, I would wager on the latter.
That’s not to say that TRKA is at risk of experiencing another massive price plunge. Unlike some other situations entailing high dilution, like Bed Bath & Beyond (NASDAQ:BBBY) and Mullen Automotive (NASDAQ:MULN), the fact that its underlying business is profitable may be a factor that helps the stock hold onto its value, preventing a spiral towards zero.
However, if management continues to engage in transactions that do not align with the interests of outside shareholders, the stock will likely continue to languish at its current discounted price.
With this, skip out on TRKA stock, and focus on other deep value opportunities. These less high-profile plays may have greater potential.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.