With $2.5 Billion Raise, the GameStop Show Is Over and it's Time to Move Along
Trading in GME recaptured the imagination of meme stock traders but lightning is unlikely to strike a third time.
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The last few weeks of GameStop GME trading have been a spectacle of market inefficiency, FOMO, short-squeeze hopes part deux and an attempted manifestation of the little guy winning on Wall Street.
Three years after GameStop first captured the imagination of retail traders, this unique sideshow came to a crashing end on Friday, with GME down 40% after Keith “Roaring Kitty” Gill’s livestream flopped.
The only good news for GameStop is that since Gill started posting memes on X, GME has made two at-the-money (ATM) offerings. The first one was completed on May 24, 2024, netting GME around $900 million by selling 45 million shares at an average of $20.75. The second ATM announced on Friday for 75 million shares will likely be completed this week and raise close to $2.5 billion. The 40% dilution from these two offerings — far less dilution than would have been necessary a month ago — brings many new shareholders and much-needed cash for GameStop to execute its plan to allow CEO Ryan Cohen to invest proceeds in transformative ways.
Gill’s trainwreck YouTube livestream had a main investment thesis of confidence in Cohen to invest wisely in a way that dramatically benefits GME shareholders. Not exactly novel. Although this thesis carries more realism now that GME has raised $3.5 billion in a few weeks, investors will still be left hanging. On Wall Street, the mystery and anticipation surrounding GME went much further and quicker than the stark reality of Cohen’s difficulty to create tangible returns for investors.
The fundamental problem for Cohen is that legacy GameStop will be a considerable drag on new ventures and investments, even if they produce solid returns. GameStop’s earnings release last Friday showed that the business is in a tailspin, with revenues down 26% year-over-year. GME’s enterprise value of $7 billion at $25 already puts a “Ryan Cohen” premium on the share’s valuation by billions.
While conspiracy-minded retail investors may believe Wall Street pros suppress the stock price, on any comparative metric, GME already trades at a massive premium to its intrinsic value.
Lightning struck GME twice in the last few weeks, rallying by three-to-five times its price, before falling back both times, on the thinnest of nostalgic meme hype from Roaring Kitty. The rally and massive volume speak to the euphoric mood on Wall Street with speculative fervor from retail investors, and more of a long stampede than a short squeeze. While the rally allowed GameStop to raise significant capital, any further rallies will need real meat on the bone. Expect diminishing excitement from meme traders and a tougher slog to rally shares with 40% more shares outstanding. However, a sure rally and selling opportunity will soon arise when the 75 million share ATM is completed.
In all likelihood, GME will then drift lower, ending another chapter of meme stock madness. When all the hype is stripped away, true value creation at GameStop will take transparently-savvy moves with their newfound capital that will take time to unfold. Cohen can possibly invest in a hot AI startup or another attractive sector with tremendous growth promise. Yet, the drag of an overvalued GameStop stub could easily offset any positive investment returns. Investors would likely find more success investing in AI or other growth industries directly than through an already well over-valued GME investment vehicle.
Those waiting for more lightning in a bottle will be left disappointed. It’s time for Wall Street’s attention and meme stock traders to move along; there’s nothing left to see here.
At the time of publication, Ginesin had no positions in any securities mentioned
