Why didn’t GameStop take advantage of the insane rise in stocks?


GameStop’s stock has garnered worldwide attention amid sharp speculative gains and the hype surrounding retail and rookie Robinhood investors clashing with major hedge funds. Why didn’t the company take advantage of this growth to sell additional shares and attract investment?

GameStop (GME) stock has been the subject of a lively debate among stock market analysts and has been among the key Wall Street news in recent weeks.

American offline video game and console retailer GameStop has become the target of major “short” sellers, but due to massive buy rates from retail investors and newbie investors on platforms such as Robinhood, GameStop shares have risen rather than “Short” sellers suffered heavy losses.

From a price of about $ 17 at the beginning of 2021, GameStop shares hit an incredible $ 350 on January 27 (less than a month), and during the next trading day their price reached $ 483 per share.

However, this growth in GameStop shares was speculative and there were no real prerequisites for it – the chain of physical stores suffered losses, since its transition to digital sales was very weak, and the competition was very high. Marketinfo.pro wrote more about this in the article “Wall Street Expects GameStop Shares to Fall After Speculative Growth of 145%”.

Today, GameStop shares have lost 90% of that gain – their price at the close of trading on Thursday was $ 53.5, and many analysts do not even recommend holding them.

In retrospect, the obvious question for many is why GameStop hasn’t capitalized on this rally to sell its additional stock for a chance to save its dwindling business.

Many public companies enjoy growth and demand for their shares from investors – during these periods they issue additional shares, thus attracting free, non-credit funds, which they use to pay off their debts or invest in expansion, acquisitions, etc.

Unlike the initial sale of shares during an IPO (initial public offering of shares), which occurs only once when a company enters the stock market,
such “secondary shares” may be issued by the company frequently.

The pharmaceutical company Moderna (MRNA), for example, capitalized on rallies amid investor expectations for the sale of its COVID-19 vaccine, and issued significant secondary shares in May 2020.

With the surge in biopharmaceutical stock prices, these companies had an excellent time to raise much-needed cash for clinical trials and marketing efforts by issuing additional shares.

Another example is the companies hit hard by the pandemic – for example, the cruise company Carnival issued additional shares not at an inflated price, but on the contrary, at low prices (shares fell due to the pandemic crisis). However, in this case, Carnival was motivated to pay operating expenses, as the company’s ships remained in port, revenues plummeted and did not allow to cover costs.

Given the insane rise in GameStop’s share price, issuing even a relatively small volume of 1 million shares could bring the company hundreds of millions of dollars to strengthen balance sheets, create e-commerce opportunities, and more.

GameStop reportedly filed for up to $ 100 million in shares, but the US Securities and Exchange Commission (SEC) likely rejected it.
The fact is that such a secondary placement poses huge risks for investors. A sharp speculative rise in stocks may be followed by an equally strong fall.

A similar precedent was the case with Hertz Global Holdings, when the SEC took similar action in June 2020, halting a secondary share offering of a large car rental company.

Hertz shares jumped despite filing for bankruptcy protection, leaving very little chance for shareholders to get anything back in the long term. In an effort to do everything possible to pay off debts, Hertz sought to sell the shares at an inflated price at that time. Later, after review by the SEC, Hertz abandoned these plans.

Huge responsibility

The reason for the refusal, both in the case of Hertz and in the case of GameStop, is the consequences that may arise for companies after such a secondary share offering.

Regardless of how clearly GameStop claimed that its shares were misjudged, investors would go back and file lawsuits against the company when its share price fell. The resulting hassle, expense and bad reputation would not be good for GameStop.

Curiously, AMC Entertainment Holdings (AMC), which found itself in a similar situation, ended up doing a secondary public offering. However, AMC received only about $ 5 per share on the offering, well above its $ 2 per share price from the previous year, but well below its peak of $ 20 per share. So far, AMC’s share price has stayed above that $ 5 mark, but if it falls further, it will be interesting to see how “cheated” investors react.

So far, analysts see little opportunity for continued significant growth in GameStop shares, even real preconditions for growth may cause negative bias among some investors.

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