GameStop plans to sell millions of shares at prices juiced by this year’s parabolic run. The stock sank on the news before bouncing back by early afternoon.
Under the newly announced offering, videogame retailer GameStop (ticker: GME) said it plans to sell up to 3.5 million shares at market prices.
GameStop stock slipped to as low as $164.81 Monday morning, down 13.9%. But shares were back to $186.95, down 2.4%, as of close.
The company in December had announced a $100 million at-the-market (ATM) offering when shares were trading around $16.94. Then came January and February’s rapid run-up, during which GameStop opted not to sell stock initially. Although the new offering would raise more capital, it would also dilute existing shares by about 5%, according to a person familiar with the matter; the prior offering was expected to bring about 10% dilution because the company was expecting to sell more shares at far lower prices.
“The company’s decision to increase the size of its ATM Program is understandable, given the stock’s elevated price,” wrote Telsey Advisory Group analyst Joseph Feldman in a report.
While Feldman still thinks the company will benefit from last fall’s launch of new videogame consoles and efforts by Chewy (CHWY) co-founder and GameStop director Ryan Cohen to transform the company’s e-commerce offerings, Feldman maintained a $30 price target on the stock.
Director Cohen has a roughly 13% stake in the company. He’s chairing a board committee geared toward transforming the company. GameStop has attractednotable e-commerce talent from firms such as Amazon.com(AMZN), Chewy,Walmart(WMT), and Qurate Retail(QRTEA) unit QVC since Cohen joined the board in January.
Feldman wrote, “the company has yet to show financial success in an industry that is rapidly shifting to digital. And, we continue to believe the current valuation far exceeds our rosy fundamental expectations and projected multiyear benefits from the strategic transformation.”
GameStop said it plans to put net proceeds toward its transformation, general corporate purposes, and the strengthening of its balance sheet. When and if it sells shares will depend on a variety of factors, GameStop added.
The stock sale news is mixed for GameStop. Existing shareholders may reconsider the stock’s current valuation and expected dilution, especially as short sellers are provided easier opportunities to cover their bearish bets. But the fresh capital is sure to boost Cohen’sstrategic vision.
Also on Monday, GameStop said sales for the five-week period ended April 2 were up 18% year-over-year, signaling improving trends from the start of the pandemic in the U.S. The company said that this year, it operated with 13% fewer stores due to its strategic closures.