Is red-hot Intuitive Machines (LUNR 2.40%) 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.

What is a warrant redemption?

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).

Why Intuitive Machines wants to get rid of its warrants

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.

Image source: Getty Images.

What happens next

Intuitive Machines says "any Warrants that remain unexercised at 5:00 p.m. New York City time on the Redemption Date [which is March 6, 2025] will be void and no longer exercisable." So one way or another (or another), by the time March 6 rolls around, all Intuitive Machines stock warrants will either have (1) been exercised, generating $11.50 each for Intuitive Machines, or (2) been redeemed, costing Intuitive $0.01 each, or (3) expired worthless.

Option 1 is of course the most likely outcome. According to Securities and Exchange Commission (SEC) filings, Intuitive Machines originally had 22.6 million warrants outstanding. Multiplied by $11.50 each, that means the company can probably expect to soon collect approximately $260.3 million in payments (minus the value of payments for any warrants that were exercised before the redemption announcement), and to issue 22.6 million new shares for them.

The ultimate effect of these changes: Intuitive Machines' cash reserves will rise to approximately $350 million, and its share count will rise to 113.9 million.

That's a significant amount of share dilution -- roughly 25% on a share count that currently stands at 91.3 million -- which isn't great news for investors and probably explains the stock's recent weakness. On the plus side, the $350 million in extra cash will come in handy as Intuitive Machines continues to build bigger and better lunar landers for NASA, and begins work on its gigantic $4.8 billion NASA contract to build a space communications relay from the Earth to the moon.

Dilution notwithstanding, I have to think this development is a net positive for Intuitive Machines stock, and that investors who've been selling the stock lately are making the wrong call.