What Does GameStop’s Share Split Mean For The Short Squeeze?
BlackBull Markets | Apr 04, 2022 08:33PM ET
2022 is looking like a 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 Mar. 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 (NASDAQ:AAPL) 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 is among the favorite meme stocks on Reddit forums like the wildly popular subreddit WallStreetBets , where users discuss the stocks 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, Apr.1, as many investors are unable to justify the company's stock price given its poor financials.
h2 GameStop's Financials Fail To Keep Up/h2In 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. Before 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.
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Justin Dopierala, the founder of DOMO Capital, was quoted by Digital Trends as saying,
“This greed by the short sellers to have GameStop go bankrupt — ironically, they now saved GameStop for probably forever,”
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 the fiscal year 2022.
h2 Risky Bet For Short-Sellers/h2For short-sellers, GameStop’s planned stock split would force them to buy additional shares before returning 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.
Meanwhile, 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.
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