Buy GameStop Shares on Bitcoin Gamble? The Company Sure Doesn’t Want Them
GameStop has the cash to buy bitcoin, and is raising more capital. Does that sound like a company that believes in itself and its products?
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GameStop GME is back in the headlines, and the stock is making moves.
Earlier this week, the Grapevine, Texas-based video-game retailer announced plans to add bitcoin as a treasury reserve asset. The announcement came on the heels of an underwhelming report that saw GameStop beat earnings estimates, but fall short on estimated revenues.
A New Strategy?
GameStop’s bitcoin gambit is drawing comparisons to Strategy, the company formerly known as MicroStrategy MSTR.
Strategy is a Tyson’s Corner, Virginia-based software company that has essentially re-invented itself as a bitcoin holding company. Strategy holds over 506,000 bitcoin, at an average cost of just over $66,000 per coin.
Cash for Bitcoin
Strategy currently owns about $33 billion in bitcoin, while GameStop has about $5 billion in cash. GameStop raised much of that capital via secondary stock offerings.
Two secondary offerings in the past year raised about $3 billion in cash. The offerings also caused GameStop’s outstanding share count to explode from 258 million shares in mid-2020 to over 437 million shares today.
Essentially, this means GameStop prefers bitcoin over shares of its own stock. That shouldn’t build investor confidence, yet shares of GameStop gained 11.6% Wednesday.
Why doesn’t GameStop simply buy bitcoin with its own earnings, instead of diluting the company’s shares? For the answer, take a look at GameStop’s declining revenues.
According to the above chart, GameStop’s revenues peaked over a decade ago.
Right on Cue
The company has shown a pattern of using bullish events to unload its shares. Last year, when shares popped thanks to the reappearance of internet stock guru Roaring Kitty, the company unloaded 45 million shares in May, and an additional 75 million shares in June.
As if on cue, GameStop used Wednesday’s 11.6% rally to raise more capital. The company took actions that will likely lead to an even greater number of shares on the market.
Not long after Wednesday’s closing bell, GameStop announced a $1.3 billion private offering of convertible senior notes. Upon conversion, the notes can be paid with cash and/or common stock.
The news sent the stock spinning lower in after-hours trading.
Hope Is Not a Strategy
It seems GameStop’s plan is to gamble on bitcoin. They will buy bitcoin and hope it goes higher. Does that sound like a company that believes in itself and its products?
Some companies, like Apple AAPL, buy their own shares. It’s a sign of confidence. By reducing the supply of outstanding shares, each remaining share gains value.
Conversely, companies like GameStop tend to sell their shares. By increasing the supply of shares, each share loses value.
The question investors should ask themselves is this: Why would you buy shares of GameStop when the company itself doesn’t want them?
At the time of publication, Ponsi was long AAPL.
