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GameStop to Sell Stock After Social-Media Fueled Trading Frenzy

Could it fuel the company’s turnaround?
(Emil O)
(Emil O)
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GameStop is planning to raise up to $1 billion from stock sales in near future, WSJ reports.

Why It Matters: Well, it has to pay for its grand turnaround plan somehow. The meme stock frenzy radically changed the company’s fate and drove its price up. But it didn’t magically transform GameStop into a fundamentally sound company. A stock raise gives the company a pipeline to cash in on its elevated prices as it tries to reinvent itself.

The Details:

  1. GameStop said it plans to sell up to 3.5 million shares, but was non-committal on timing.
  2. In the past, GameStop has avoided unloading stock to secure cash, a move AMC Entertainment has used before.
  3. Shares saw a 10% drop in premarket trading on Monday after GameStop revealed its intentions and disclosed preliminary sales figures.

Sales Watch:

  1. GameStop said its sales increased by around 11% for the nine weeks ending on April 3, compared to the year-earlier period.
  2. After its operations were hit by lockdown restrictions and store closures from the Covid-19 pandemic, GameStop has approximately 13% fewer stores than it did last year.

The Bottom Line: It’s anybody’s guess if the company can complete its turnaround, but GameStop wants to move away from brick-and-mortar and become a technology-centric company.

Justin Oh:

If a company’s management team believes a stock price is fully priced (or overpriced), they will be more inclined to issue stock for cash. 

  • The higher the company is valued, the less of the company they have to “give away” in exchange for cash. 
  • The lower the company is valued, the more of the company they have to “give away” in exchange for cash.

Thus, it stands to reason that this is a subtle sign that GameStop’s ($GME) stock might be higher than management believes intrinsic value to be.

Additionally, because $GME is down 10%, the market clearly believes that the company will not use the cash to create more value than the value of the stock sold to new investors. In other words, the market believes the stock sale to be net “dilutive” to shareholders.

But you all probably already guessed that $GME might be overvalued, right?

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