GameStop: diamond hands are not forever
Day traders on Reddit board WallStreetBets claim “diamond hands”. That term describes holding on to one’s stock position, no matter what. But even diamonds get scuffed. GameStop’s share price slid nearly 20 per cent on Thursday after the video game retailer unveiled plans for its second equity raise this year.
To be fair, GameStop is right to cash in on its meme-stock fame. Despite Thursday’s drop, it remains up a ridiculous 1,300 per cent this year. It now wants to raise as much as $1.27bn through the sale of 5m shares, having sold 3.5m shares in April.
That earlier sale helped repair its balance sheet. A debt-free GameStop now boasts having $771m in cash. First-quarter results offered encouragement. Revenue grew for the first time in three years and losses narrowed to $67m, compared to $166m a year ago.
But these improvements still cannot justify GameStop’s valuation. Its $18bn market value puts it nearly on par with Tractor Supply. Yet this rural lifestyle retailer earns profits, pulling in more than twice the revenues last year.
Meme stocks do rely on bullish sentiment not fundamentals. On this front Ryan Cohen, the co-founder and former chief executive of online pet supply retailer Chewy, scores highly. After taking a stake in the games retailer last November, Cohen won three board seats and now chairs GameStop. This week he appointed two former Amazon executives as chief executive and chief financial officer.
GameStop loyalists bet that Cohen can transform the bricks-and-mortar retailer into the Amazon of the video gaming industry. But he has provided very little detail on how he proposes turning GameStop into an online hub for ecommerce, esports and online gaming.
The release of new gaming consoles from Sony and Microsoft this year should add to GameStop’s revenues. But longer term, its revival cannot depend on sales of hardware updated every seven years. GameStop has rightly used its lofty valuation to raise capital. It needs to prove it can parlay those funds into creating something more than just an internet sensation.