Tag Archives: GME

Could the Government Sue Wallstreetbets Over GameStop?

Traders on Reddit’s Wallstreetbets who are pumping GameStop stock could get in trouble with the law. From Lawyer Monthly:

There’s no clear indicator that what occurred is illegal, but it certainly falls within a shady area.

A large number of the investors who joined in, certainly in the later stages, were just jumping on a trend that could earn them money. That’s not the case for those who kicked things off, and that’s where there may be problems. However, even then, it’s not clear because “pumping” a stock for fun, provided that you’re not releasing misleading information, doesn’t technically fall foul of the law. There’s a strong argument that the subreddit thread didn’t have the capacity on their own to change the market substantially. In addition, they didn’t release misleading information to induce others to buy. For these reasons, the SEC and FCA may well decide that although dubious, there were no illegal manoeuvres.

I would expect the most at risk posters to be people with large positions who were early to a campaign to lift a stock like GameStop. Others have been successfully sued by the SEC for buying a stock and promoting it online message boards. However, there are two significant legal precedents in the US that may protect the Reddit traders.

If you want to participate in these runs on meme stocks, the safest way to do so is quietly. Let others do the talking and, if necessary, take the hit.

Nonetheless, if you want to participate in these runs on meme stocks, the safest way to do so is quietly. Let others do the talking and, if necessary, take the hit.

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

AMC Shareholders Could Lose Most of Their Ownership. Again.

CEO Adam Aron told FOX Business Network’s “The Claman Countdown” Monday that the company has asked its shareholders to approve up to 500 million shares, even though there is no intention of using them all at this time.

Aron insists he doesn’t plan to issue them all at once:

And we’ve asked our shareholders to approve up to another 500 million shares, not that we would use any amount like that any time soon. But we’re going to make sure – AMC was a very successful company for 100 years – we’re going to make sure that AMC theaters is around and is a very successful company for the next 100 years …

More here.

The thing is, AMC has only 450 million shares outstanding. This would more than double their share count, meaning every existing shareholder loses most of their ownership stake in the company. Perhaps they don’t intend to issue them all at once, but something tells me they won’t be issued over 100 years either. If you only intend to sell a few in the near term, why not authorize just that, rather than a wholesale dilution of the existing shareholders?

This comes on top of a massive dilution last year. AMC had about 100 million shares in the fall of 2020. They’re now at 450 million. And they could go to a billion at any time if this proposal goes through.

That would mean anyone who’d owned shares as of fall 2020 would’ve lost 90% of their ownership stake in the company. Granted, it’s a stronger company with the additional capital, but this level of dilution is rare.

How is the stock reacting to all this? Just fine, thank you. In fact, it’s gone up approximately 5 fold since the end of 2020, despite 80% dilution, which is headed to 90% if these additional shares are issued.

This defies all logic. I suspect the retail investors piling into AMC don’t know about the dilution or don’t know what dilution is.

As much as one would like to pull for a classic American institution like AMC, I suggest doing so by attending a movie, not buying what’s left of the stock.

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Photo: “AMC Theaters” by JeepersMedia is licensed under CC BY 2.0

GameStop Plans to Dilute Shareholders, Issue Hundreds of Millions in New Stock

Well, it’s here:

GameStop Corp. GME -3.90% said it could raise hundreds of millions of dollars from stock sales in the coming months, as the videogame retailer turns to public markets to help support its turnaround plan.

The company said Monday that it would sell up to 3.5 million shares, adding that the timing and amount of any stock sale would involve various factors.

Plans for issuing more shares were in their most recent annual report, as I called out here on March 25th.

3.5 million shares would be about 5% of the current shares outstanding. With GameStop’s share price still 60x above where it was a year ago, I would expect further capital raises. If they can use the money wisely to fund a turnaround to e-commerce, this could wind up being a positive for shareholders in the long term, but in the short term any dilution is likely to hit the stock’s price.

GameStop has failed at turnarounds before, and I’m skeptical they can do it right this time. If not, shareholders are left with diluted shares in a company that’s hit a dead end.

For more on GameStop, check out these posts:

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

Has GameStop’s Business Peaked?

GameStop’s 2020 results, released this week, were disappointing, with losses over $200 million last year.

These weak results may be the best GameStop is likely to do for some time. The reason is something called the “video game console cycle.”

Video game consoles are a huge part of GameStop’s business, especially with the games themselves increasingly moving to digital downloads. New consoles sell like crazy when they’re first released. Gamers line up outside stores, sometimes even overnight, eager to get their hands on the latest tech.

And then…the enthusiasm fades. Sales of the console drop, and another doesn’t come out for 4-7 years. The lines outside GameStop disappear, and business gets tougher.

There are three major video game console makers: Microsoft, Sony and Nintendo. Microsoft and Sony just released new consoles in November 2020, right in time for the Christmas rush. Nintendo’s latest console came out in 2017, and they may have a new one ready within a few months.

Where does that leave GameStop in the later months of 2021 and in the next several years? All the major companies will have recently introduced new consoles, and their sales will have started to drop off. Physical game sales are likely to continue to be supplanted by digital downloads. And whatever rent abatement they were able to get from landlords due to COVID will have likely ended.

This could lead GameStop to much bigger losses in the future. Indeed, before COVID, losses were significantly larger, coming in at $500 million and $700 million for 2019 and 2018 respectively.

If Chewy founder Ryan Cohen and the team he’s putting in place can turn GameStop into a viable e-commerce business quickly, they may escape this fate. But they have 5,000 stores with long term leases and limited cash reserves to fund this transition.

Investors may be expecting a brighter future for GameStop with Mr. Cohen’s changes and the end of COVID, but I suspect the mediocre results we saw in 2020 may be a best case 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

Are GameStop Shareholders About to Be Diluted to Oblivion?

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

You Won’t Believe Just How Volatile GameStop Is

The volatility in shares of GameStop Corp. has been widely reported, but just how volatile they’ve been this year truly boggles the mind. I found this gem in their annual report, which was just released this week:

…from January 11, 2021 to March 17, 2021, the closing price of our Class A Common Stock on the NYSE ranged from as low as $19.94 to as high as $347.51 and daily trading volume ranged from approximately 7,060,000 to 197,200,000 shares. During this time, we have not experienced any material changes in our financial condition or results of operations that would explain such price volatility or trading volume.

In just two months, shares varied by a factor of 17 and volume by a factor of 28, all with no news from the actual business!

Any shares that volatile are best avoided, in my opinion. Maybe you time it right, but very probably you don’t.

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Photo: “Huge Wave” by Duncan Rawlinson – Duncan.co is licensed under CC BY-NC 2.0

GameStop Sales Down 40% in 2 Years

Digging into GameStop Corp.’s annual report today, which just came out after yesterday’s market close, a couple numbers really stuck out to me:

  • Sales are down 40% in 2 years
  • Shareholder equity is down 80% in 2 years

And lest we blame COVID for all of this, note that the percentage sales decrease from 2018 to 2019 was slightly larger than that from 2019 to 2020. In all, the business shrunk a bit more than 20% both years.

These losses are taking a serious toll on shareholders’ investment. $2.2 billion in shareholders’ equity in 2018 was reduced to just $400 million by the end of 2020.

GameStop shares have reacted quite negatively to this report, dropping over 30% today so far. Speculation has driven the stock up a great deal this year, but this business is shrinking fast. How much longer can speculation support it? You can’t shrink by 20% a year for very long until your business ceases to exist.

There were a few bright spots in the report. Losses, inventories, and long term debt are all down. Losses have also dropped as a percentage of revenue. And most of the board is expected to resign soon, perhaps giving Chewy founder and board member Ryan Cohen a freer hand to transform the company into an e-commerce business.

But he will face an enormous drag from 5,000 money losing stores, many of which have long term leases that will saddle the company with losses for the forseeable future. His competitors, like Amazon, Microsoft and Sony, don’t face that drag on their performance.

The video game business is increasingly based on downloads. Microsoft and Sony have even released diskless consoles, removing any need or even possibility of buying games for them at GameStop.

There were a few positives in this report, but the overall picture is of a dying business that will be difficult to turn around due to its existing obligations and weak competitive and financial position. I’ll be staying away from this one.

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

Top GameStop Executive Resigns Suddenly

GameStop’s chief customer officer is resigning from the video-games retailer, per a Tuesday Securities and Exchange Commission filing released hours before the company announced its 2020 earnings.

The filing said that Frank Hamlin, who also serves as executive vice-president, would leave the company on March 31, following a transition period.

GameStop did not disclose the reasons for his departure, but said that he would be entitled to the payments, rights, and benefits associated with a “good reason” resignation.

Hamlin started as CCO in June 2019, and is responsible for initiatives around marketing, customer loyalty, strategy, and innovation.

GameStop and Hamlin entered into a Transition and Separation Agreement on Sunday, the company said.

More here.

It strikes me as odd that someone would resign with just 10 days notice, especially a top executive. Even for rank-and-file employees, at least two weeks is standard. It’s also unusual that he was only at the company for 9 months. This comes shortly after the departure of CFO Jim Bell, who reportedly was forced out by board members including Chewy founder Ryan Cohen.

This makes me wonder if Cohen is finding some resistance to his transformation plan, or if perhaps fourth quarter results, which are coming out in a few hours, are going to be worse than expected.

There’s yet another possibility: the GameStop execs are too rich to care anymore. The run-up in the stock, fueled by traders at Reddit’s Wallstreetbets, has made many of them extremely wealthy. Both Bell and Hamlin hold over $100 million in GameStop stock.

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

GameStop Has Failed to Modernize Before. This Is What Happened.

Many investors are excited about Chewy founder Ryan Cohen joining the GameStop Corp. board and helping the company transition to e-commerce. But what isn’t as widely known is that GameStop has tried this before, with abysmal results:

Wall Street and short sellers placed heavy bets against GameStop because of strategic missteps. The company, at one point, latched onto game downloads as well as another trend now gaining momentum known as cloud gaming, or the Netflix-like streaming of games. But products gained with two acquisitions made in 2011 of companies specializing in those areas were abandoned after about two years.

“A lot of the initiatives that we had brought to the table and invested in just died on the vine,” said Chris Petrovic, who joined GameStop in 2009 to spearhead the retailer’s digital ventures, in an interview this month.

The article is referring to the acquisitions of Impulse and Spawn Labs. GameStop bought them just one month a part in 2011. Impulse was a system to digitally download games, and Spawn Labs allowed people to stream games.

But rather than seize the future with these two acquisitions, GameStop wound up shuttering both within just 3 years. It replaced Impulse with its own download software and shut down Spawn Labs claiming that the customer wasn’t yet ready for cloud-based gaming.

How many millions of investor dollars did GameStop pay to buy these companies, only to shut them down shortly therafter? They also bought mobile phone retailer Spring Mobile to try to get into smartphones. That business drastically underperformed and GameStop sold it a few years later, having little but debt to show for it.

In all, each time GameStop has tried to reinvent itself, it has quickly failed and abandoned the program. Will this change under Mr. Cohen’s leadership? Perhaps. But I wouldn’t want to bet $195 a share on it.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Video Game Sales Going Digital Could Make GameStop a Dinosaur

I came across an incredible stat on the video game industry this morning. In just nine years, it’s gone from almost entirely physical to almost 100% digital:

Physical video game sales from computers & consoles have made a dramatic shift since 2009. In 2009 physical sales still accounted for 80% of the market and decreased to 17% a decade later in 2018. Video game consoles such as Xbox come with a 512GB or 1TB drive in addition to an optical drive. Profits and efficiency will continue to drive this market and I believe physical games will be a thing of the past. This presents a huge problem for GME over the next decade. Eventually the new consoles will come without an optical drive and the older systems will lose most of their allure causing the secondary market to dry up. Without the secondary market for games to trade and sell their used games GME will lose foot traffic in addition to a large business segment.

GameStop Corp. relies on secondhand game sales for a substantial portion of its business. There are no secondhand sales of digitally downloaded video games.

GameStop also has 5,000 physical stores that have little purpose in a world where almost all games are sold via digital download. And they’re locked into those leases for years, in many cases. This will drain capital and attention from their ambition to become an e-commerce leader.

In all, the industry has passed GameStop by and companies like Microsoft or other game publishers are in a much better position to benefit from these changes.

For more on GameStop, check out these posts:

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Photo: “Dinosaur” by shvmoz is licensed under CC BY-SA 2.0