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

Mark O’Donnell Blackbull Markets Limited

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.

Also read: MULN stock loses ground as Polestar-Hertz deal sees Mullen Automotive take back seat

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.

Author

Mark O’Donnell

Blackbull Markets Limited

Mark O’Donnell is a Research Analyst with BlackBull Markets in Auckland, New Zealand.

EUR/USD holds losses near 1.1850 as US, China holidays keep trade muted

EUR/USD opens the week on a softer note, trading near 1.1860 during the Asian session on Monday. Activity is likely to remain muted, with United States markets closed for the Presidents’ Day holiday, while Mainland China is also shut for the week-long Lunar New Year break.

GBP/USD flat lines as traders await key UK macro data and FOMC minutes

The GBP/USD pair kicks off a new week on a subdued note and oscillates in a narrow range, just below mid-1.3600s, during the Asian session. Moreover, the mixed fundamental backdrop warrants some caution for aggressive traders as the market focus now shifts to this week's important releases from the UK and the US.

Gold remains below $5,050 despite Fed rate cut bets, uncertain geopolitical tensions

Gold edges lower after registering over 2% gains in the previous session, trading around $5,030 per troy ounce during the Asian hours on Monday. However, the non-interest-bearing Gold could further gain ground following softer January Consumer Price Index figures, which reinforced expectations that the Federal Reserve could cut rates later this year.

Week ahead: Data blitz, Fed Minutes and RBNZ decision in the spotlight

The US jobs report for January, which was delayed slightly, didn’t do the dovish Fed bets any favours, as expectations of a soft print did not materialize, confounding the raft of weak job indicators seen in the prior week.

Global inflation watch: Signs of cooling services inflation

Realized inflation landed close to expectations in January, as negative base effects weighed on the annual rates. Remaining sticky inflation is largely explained by services, while tariff-driven goods inflation remains limited even in the US.

Ripple Price Forecast: XRP potential bottom could be in sight

Ripple edges up above the intraday low of $1.35 at the time of writing on Friday amid mixed price actions across the crypto market. The remittance token failed to hold support at $1.40 the previous day, reflecting risk-off sentiment amid a decline in retail and institutional sentiment.