Troika Media Group (NASDAQ:TRKA) is a penny stock that has garnered investor attention in the past month. During late February and early March, TRKA stock went “to the moon,” as they say. During this time, shares zoomed from 25 cents to 99 cents per share.

However, much like how things usually play out for “flavor of the month” penny stocks, the TRKA rally has fully reversed course. In just a few weeks, shares have coughed back all of their recent gains, and then some.

Previously, I have argued that there may be more to Troika than merely hope and hype. This marketing and brand-building firm reported strong and promising results for the preceding quarter. Further operational developments might drive a rebound.

With all of this in mind, what’s the best move now for this stock? Let’s find out.

Why TRKA Stock Plunged After Earnings

There’s no getting around the fact that the end of the Troika Media Group mega-rally coincided with the company’s latest release of financial results. It was right after the earnings release (March 7) that shares began their extended decline.

TRKA stock dropped by 26.85% that day, another 38.8% the following day, and continued to slide thereafter. At first glance, this may make it seem as if the results were horrendous, justifying such a sharp decline.

However, the takeaway here is not so simple. For one, this stocks’ rally ahead of earnings was driven primarily by the its popularity as a short-squeeze play. Perhaps looking for an opportune time to cash out, speculators who dove in during the squeeze wave sold en masse, resulting in this high level of post-earnings pressure.

That’s not all. As InvestorPlace’s Thomas Yeung discussed March 20, besides providing its latest financials, Troika Media also revealed a 400% increase in share count. This was of course a negative for existing shareholders, but for those just now considering the stock, it may not be so major of a deal breaker.

Weighing Risk Against Reward

Considering both the speculative frenzy and the unforeseen shareholder dilution, it’s not surprising that sentiment has shifted for TRKA stock. Still, after dropping by nearly 80%, shares may have entered oversold territory.

While an obviously risky stock, and not one for more conservative investors, those with a stomach for high volatility, and the potential for high reward, may still want to monitor it. Although the just-reported high dilution is a red flag (given it could signal more high dilution down the road), Troika’s improving fiscal performance could more than make up for it.

Because of last year’s acquisition of Converge Direct, Troika reported a more than twelve-fold increase in revenue (1125%), for the six-month period ending Dec. 31, 2022. This acquisition has resulted in a big swing in profitability (on an adjusted EBITDA basis).

Adjusted EBITDA came in at $4.95 million. That represented a major improvement from the $4.58 million EBITDA loss reported for the six-month period ending Dec. 31, 2021. If Troika can make further improvements to earnings in the coming quarters, it may have a path for its shares to pull off a rebound.

Bottom Line

TRKA clearly doesn’t deserve to be immediately tossed into the “avoid” pile. While the risk/reward may be favorable, that’s not to say that the “best-case scenario” will play out.

As Yeung also reported in his latest analysis, while Troika reported a big swing in adjusted EBITDA, this figure came in short of his forecast. Future operational improvements may not materialize.

Troika could also decide to pursue additional acquisitions, financed through dilutive means. These deals could end up being far less lucrative than the Converge Direct deal, destroying rather than adding value.

Investors went overboard abandoning TRKA stock in droves. However, a good deal of its recent decline was warranted, considering the uncertainty. With this, wait for additional developments, before taking the plunge.

TRKA stock earns a C rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.