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Why Shares of Pareteum Are Down Today

Lou Whiteman, The Motley Fool

What happened

Shares of Pareteum (NASDAQ: TEUM) fell more than 15% on Monday morning after the cloud-communications platform company amended its credit agreement. The deal gives the company access to $2.5 million, but it also threatens to dilute existing shareholders.

So what

In a statement announcing the amendment to its credit agreement with senior secured lender Post Road Group, Pareteum CEO Hal Turner said the deal "puts the company on a firm footing for our ambitious growth strategies."

A sad man in front of a falling stock chart.

Image source: Getty Images.

But investors were more focused on the details of the agreement as disclosed in a securities filing. As part of the deal, Pareteum agreed to issue 550,000 shares to Post Road on Aug. 22 and an additional 250,000 shares on Nov. 15, 2019.

While issuing shares does threaten to dilute existing shareholders, the market reaction on Monday is far greater than the impact of the added shares. The 800,000 new shares headed to Post Road represent less than 1% of the company's 106.8 million-share float.

Now what

So what's really going on? Pareteum shares have been under pressure since June, when the company was the target of a short report warning of "massive downside potential" and calling the company "uninvestable." Regardless of whether the report is correct, it has left the markets nervous about Pareteum. In such a climate, investors tend to react strongly to any sort of news, negative or positive.

With Monday's slump, Pareteum shares are now off 40% since the beginning of June. Chances are the stock will remain volatile in the quarters to come while Pareteum either puts the concerns highlighted in the short report to rest or spooks investors by failing to do so.

Tech stocks offer great potential but also can be fraught with risk. For now, investors are best off watching Pareteum from the sidelines.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com