What does GameStop’s (GME Stock) share split mean for the short squeeze?

2022 is looking like a year of stock splits as companies seek to make their shares more appealing for retail investors. Following Alphabet (NASDAQ: GOOGL), Amazon's (NASDAQ: AMZN) and Tesla's (NASDAQ: TSLA) recent split announcements, GameStop (NYSE: GME) followed suit, hinting at plans for its first stock split in 15 years.

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The American video game retailer, which has become a favorite “meme stock” among retail investors, disclosed in an SEC filing during aftermarket hours on Thursday that it plans to implement a stock split of its class A shares in the form of a stock dividend.

GameStop said it plans to boost its share count to 1 billion from 300 million, indicating that it would carry out a three-for-1 stock split, giving existing shareholders two more shares for every share they hold in the company. The plan is still subject to shareholder approval at the company’s annual meeting.

The company’s stock, which surged to its 2022 peak of $189.59 on March 28, jumped 15% in premarket trading on Friday following the news before paring gains to close 0.8% lower on the New York Stock Exchange.

Compared with Apple and Amazon, whose share prices have hovered around $3,000 in recent months, and Tesla’s stock price that closed at over $1,000 on Friday, GameStop’s stock is relatively more affordable for mom-and-pop investors and those that are riding on a new investment trend that has become popular during the COVID-19 pandemic.

GameStop to the moon

GameStop is among the most favorite meme stocks on Reddit forums like the wildly popular subreddit WallStreetBets where users discuss the next stock to pump up. Investors piled into GameStop’s stock in January 2021, sending its shares skyrocketing 400% week on week on Jan. 29, 2021, to an all-time high of $325.

This caused a short squeeze in GameStop stocks in a blow to short sellers that collectively lost about $13 billion, according to estimates by financial analytics firm S3 Partners. Market watchers also attributed the spike in GameStop’s shares to hedge funds that made substantial profits from the short squeeze.

GameStop’s stock has since fallen 49% since that peak as of Friday, April 1, as many investors are unable to justify the company's stock price given its poor financials.

GameStop's financials fail to keep up

In the recent fiscal year ended Jan. 29, GameStop booked $381 million in net loss, 77% wider than its $215 million loss in 2020. Revenue, however, climbed to $6.01 billion from $5.09 billion the previous year. Prior to the short squeeze in January 2021, there had been rumors that GameStop may be going out of business as the company announced store closures and logged millions of dollars in debt.

“This greed by the short sellers to have GameStop go bankrupt — ironically, they now saved GameStop for probably forever,” Justin Dopierala, founder of DOMO Capital, was quoted by Digital Trends as saying.

With the money raised from the securities market, GameStop could turn its business around. The company recently disclosed plans to foray into non-fungible tokens or NFTs by the end of the second quarter of fiscal year 2022.

Risky bet for short sellers

For short sellers, GameStop’s planned stock split would force them to buy additional shares before they return their loaned shares.

As the company plans to carry out its stock split by issuing a stock dividend, shareholders who lend their shares to short sellers are still entitled to the dividend from GameStop, while the short seller will have to either repurchase the share before the ex dividend date or pay a dividend to the other party that acquired the shorted stock.