GameStop Shares Soars as Meme Stock Trade Drags On

GameStop shares are trading sharply higher today as the meme stock mania looks far from over. The gaming retailer last week announced that it has raised almost $1 billion through a stock sale in an apparent bid to capitalize on the rally.

Meme stocks were back in action earlier this month after a cryptic tweet from “Roaring Kitty” whose legal name is Keith Gill and is a former Massachusetts Mutual Life Insurance marketer.

Meme Stock Trade Is Back After a Tweet from “Roaring Kitty”

Leading the charts in the current meme stock rally were the usual names – GameStop, AMC Entertainment, Tilray, and Marathon Digital. During the meme trade of 2021, several companies used the spike in their stock prices to issue new shares which they used to repay their debt.

GameStop for instance turned net debt positive while SNDL raised so much cash that it not only repaid its debt but also turned a lender by lending money to other struggling cannabis companies.

Many analysts stopped covering meme stocks as the rally in their stocks couldn’t have been justified on fundamentals.

We saw something similar this month and just two days into the meme stock rally AMC raised $250 million in a share offering. Ironically, B. Riley Financial which was among the sales agents for AMC’s share offering is among the stocks that are on the meme stock list.

GameStop Raises $933 Million

Last week GameStop announced that it would raise cash by selling shares and on Friday the company confirmed that it raised $933 million. While the company wasn’t in any immediate need of cash it’s a smart strategy to raise cash by selling shares when they rally.

GameStop is incidentally saddled with losses and sagging growth and the stock sale would help it strengthen its balance sheet.

Analysts are meanwhile advising caution amid the rally in GameStop and other meme stocks.

Analysts Advice Caution Amid Meme Stock Rally

Steve Sosnick, Interactive Brokers chief strategist, told Yahoo Finance “If this were a normal market, people would be a little freaked out.” He added, “You don’t sell stock into the market if you think your stock is undervalued. You do it when you think your stock is overvalued.”

There indeed is merit in the statement as companies repurchase shares when they find them undervalued. When it comes to meme stocks though, they have been capitalizing on the rallies to issue new shares.

After the rally in their stocks, meme companies were able to raise cash by selling fewer shares which means less dilution.

However, the capital raises don’t guarantee success, and Naked Brands which was a prominent meme stock in 202 announced a reverse merger with Cenntro Electric Group. Also, Zomedica’s market cap is now similar to the $173.5 million that it raised through share sales in 2021.

GameStop has Been a Flagbearer of Meme Stocks

GameStop has been a flagbearer of meme stocks along with AMC Entertainment. Both these companies are in industries that are in near terminal decline – gaming retail and theaters respectively. However, a section of retail traders poured money into them expecting a rebound in the core business.

Traders saw GameStop as a turnaround candidate under the leadership of Chewy’s cofounder Ryan Cohen. To be sure, GameStop took a series of steps like diversifying into other categories and focusing on online sales to revive its fortunes. It also overhauled its leadership team as Cohen hired tech executives to lead the company.

However, the company’s core business continued to sag while many new hires either left or were let go.

GameStop Expects Sales to Fall

Last week, GameStop said that it expects its Q1 sales to be between $872 million to $892 million which is considerably below the $1.24 billion that it posted in the corresponding quarter last year and also lower than the $1 billion that analysts were expecting.

Analysts are not too convinced about the company’s outlook. Earlier this month, Michael Pachter of Wedbush Securities said in a client note “We do not believe GameStop can ‘save its way to prosperity’, and expect the mix of software sales to continue to shift to digital and away from physical.”

He added, “While there will likely be a new Nintendo console next year and an overall lift in software sales from GTA VI, we think GameStop will see continuing sales declines next year as well. Ultimately, the company must deploy its cash productively or continue to hope that it can issue more shares at elevated levels to forestall the inevitable.”

Meanwhile, even as analysts have been cautioning about the rally in GameStop shares, the stock is rising sharply today also.

Incidentally, a lot of retail trades who bought meme stocks near the peak in 2021 could never recoup their losses as these stocks did not reach those levels again. Experts see a similar playbook play out amid the current euphoria once fundamentals eventually catch up with stock prices.