GameStop Corp.’s meteoric rally this year as one of the first meme-stock icons may be losing steam after the company said it planned to sell more shares and offered few details about its turnaround strategy.
The Grapevine-based video-game retailer fell more than 27% to $220.39 Thursday. The stock, which was among the first to get a huge Reddit and social media following earlier this year, has surged about 1,300% in 2021 as retail investors banded together to take on short sellers and amid optimism on a corporate turnaround.
Investors are still waiting for a clear strategy from newly appointed chairman and activist investor Ryan Cohen. GameStop did announce a pair of new leaders from Amazon.com Inc. to help turn the brick-and-mortar chain into an e-commerce powerhouse.
“Investors deserve more than memes to value a company’s fundamental, long-term prospects,” Baird analyst Colin Sebastian wrote in a note. While clearly laying out the groundwork for digital transformation, the board is not ready to disclose details on some challenges, he said.
News that GameStop may offer another 5 million shares and that past trading activity is being investigated by the Securities and Exchange Commission is also weighing on its stock.
The video-game retailer said Wednesday that staffers from the Securities and Exchange Commission contacted the company on May 26 for voluntary production of documents and information related to the stock.
“We are in the process of reviewing the request and producing the requested documents and intend to cooperate fully with the SEC staff regarding this matter,” the company said in a quarterly filing. “This inquiry is not expected to adversely impact us.”
Since February, securities regulators have been combing social media and message-board posts for signs that fraud played a role in dizzying stock swings for GameStop, AMC Entertainment Holdings Inc. and other companies, people familiar with the matter said at the time.
GameStop is one of a handful of stocks that have been fueled by Reddit traders who invest based on social-media buzz.
“The trading probe is definitely a big red flag,” David Trainer, chief executive officer of investment research firm New Constructs, said in an interview. It may be “the needle that can bust the balloon of the stock’s valuation.”
For Wedbush analyst Michael Pachter, the outcome of the probe is unclear and investors may have been more disappointed with the planned share offering. The shelf registration “may have had something to do with” decline following results, Pachter wrote in a note Thursday. Still, he views the potential stock sale as a positive for the company as it would provide more dry powder for acquisitions.
GameStop’s earnings call, which was livestreamed on YouTube and had several thousand viewers, lasted just 11 minutes. Outgoing CEO George Sherman was the only executive who spoke, and he declined to take questions from analysts.
Sherman will be replaced on June 21 by Matt Furlong, who led Amazon’s Australian operations. GameStop also hired another Amazon alumnus, Mike Recupero, as chief financial officer.
GameStop filed for the potential sale of as many as 5 million shares through an at-the-market offering, which allows retail investors to buy in directly. It previously raised $551 million through an ATM offering in April. The company has otherwise stayed away from selling shares this year, despite calls from analysts to raise equity and a flood of similar deals by fellow meme stocks.
The retailer also reported better-than-expected quarterly sales of $1.28 billion and a loss that was narrower than predicted.
Katrina Lewis, Kristine Owram and Rob Golum,
Bloomberg News
