It’s no secret that GameStop shares are way up this year, despite recent struggles:

This could be an opportune time for the company to sell more shares to fund its transformation from a brick-and-mortar to a digital business. Indeed, the company hints at this in their latest annual report, just released after Tuesday’s market close:

Since January 2021, we have been evaluating whether to increase the size of the ATM Program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives and general working capital needs. The timing and amount of sales under the ATM Program would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our Class A Common Stock.

When a company issues more shares, that means each existing share is less valuable because it represents a smaller slice of the company. You’re slicing the pizza into thinner slices, so to speak.

To get an idea of what such a dilution could mean, consider AMC Entertainment Holdings, Inc., another darling of the Reddit crowd that has experienced a huge run up in price this year. They sold so much stock that each share only owned 20% as much of the company as before! That’s an enormous haircut for investors.

GameStop has just $635 million in cash on hand. That’s enough to avoid bankruptcy for the forseeable future, but is it enough to fund a transformation into the Chewy of video games, outcompeting the likes of Amazon and Microsoft? I doubt it. So they could go for a huge capital raise, severely diluting shareholders.

The flip side of this is if they raise a lot of money and successfully transform the business, you may not care. You own a smaller slice of the company, but the company is worth more.

However, if the transformation fails, you’re left with less ownership in a company that’s still struggling. GameStop has the drag of 5,000 money losing stores. And in a video game sales market that’s increasingly digital, with giant competitors with way more tech expertise and capital, I think dilution and a failed transformation is the more likely scenario.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

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