Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Exclusive: How GameStop missed out on capitalizing on the Reddit rally

Stock Markets Feb 11, 2021 06:40PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: People enter a GameStop store during "Black Friday" sales in Carle Place, New York

By Jessica DiNapoli, Svea Herbst-Bayliss and Joshua Franklin

(Reuters) - U.S. video game retailer GameStop Corp (NYSE:GME) decided it could not seize on the Reddit-fueled rally in its shares to sell hundreds of millions of dollars worth of stock because of regulatory restrictions, according to three people familiar with the matter.

The Grapevine, Texas-based company found itself at the epicenter of an unprecedented trading frenzy last month, as amateur investors organized on social media sites such as Reddit to bet against Wall Street hedge funds that had shorted its shares.

While many heavily shorted stocks, from movie theater operator AMC Entertainment (NYSE:AMC) Holdings Inc to headphone maker Koss Corp, also scored big rallies, "Gamestonk," as it was nicknamed by many online, including Tesla (NASDAQ:TSLA) Inc Chief Executive Elon Musk, became synonymous with the wave of trading speculation.

GameStop's market value soared from $1.4 billion on Jan. 11 to a peak of $33.7 billion on Jan. 28. At that point, GameStop could have raised hundreds of millions of dollars through a stock sale to pay down its debt pile, which totaled $216 million net of cash as of the end of October, and fund its transformation into a digital gaming service, as sales at its mall-based stores dwindle.

Yet GameStop never sold shares, the sources said, despite being egged on by many Wall Street pundits to do so. While it could still sell shares in the coming weeks, the opportunity to raise hundreds of millions of dollars has now slipped as the rally in its shares reversed. It now has a market value of $3.6 billion.

GameStop examined the possibility of selling stock during the rally, the sources said. The company had already registered with the U.S. Securities and Exchange Commission (SEC) to sell $100 million worth of stock in December, an option it did not exercise, the sources added.

GameStop decided it was restricted under U.S. financial regulations from selling shares because it had not yet updated investors on its earnings, the sources said. The SEC requires companies to have released such information when conducting stock sales. While GameStop had started preparing results for its fiscal fourth quarter, which ends in January, it was not due to report them for several more weeks, the sources said.

By the time its shares took off in the second half of January, executives had already compiled data and had a clear picture of what the quarter would look like, the sources said.

GameStop could have gone ahead with a stock sale by releasing preliminary earnings. But such a move, carried out for the purposes of a stock sale, came with significant logistical hurdles and regulatory risk that the company was not willing to accept, one of the sources said. The SEC had said it would scrutinize how companies took advantage of the trading volatility to sell stock and had asked that they provide more information to investors about the potential risks.

Representatives of GameStop and the SEC declined to comment.

"They were 2-1/2 months into their quarter when all this stuff took place," said David Erickson, a finance lecturer at the University of Pennsylvania's Wharton School who was previously co-head of global equity capital markets at Barclays (LON:BARC) Plc "It's so deep in the quarter that from a legal and corporate governance perspective they would likely be obligated to pre-announce some high-level financial information for the quarter. And that can't be prepared in just a week."

AMC, AMERICAN AIRLINES

Other companies in the middle of the Reddit frenzy, whose financial quarters finished at the end of December and had already updated investors on their latest financial performance, were able to sell stock when their shares rallied at the end of January.

AMC, whose movie theater business has been hurt by the pandemic, raised roughly $1.2 billion through debt and equity deals after its shares rallied more than 700%.

American Airlines (NASDAQ:AAL) Group Inc, which has also suffered as demand for flights plummeted, pulled the trigger on a plan to sell more than $1 billion of stock last month after its shares rallied as much as 48%.

GameStop has lost market share to larger competitors, including Best Buy Co Inc (NYSE:BBY) and Amazon.com Inc (NASDAQ:AMZN), as consumers buy video games online or through big-box retailers.

Robert W. Baird & Co analysts wrote last month that the best outcome for GameStop shareholders would be for the company to close the majority of its physical stores and diversify into online businesses, including hosting tournaments and events.

One of GameStop's largest shareholders, online pet store Chewy (NYSE:CHWY) Inc co-founder Ryan Cohen, and two of his partners joined the company's board in January. Last year, hedge funds Hestia Capital Partners and Permit Capital Enterprise Fund also won seats on the board.

Exclusive: How GameStop missed out on capitalizing on the Reddit rally
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
Engin Rençber
Engin Rençber Feb 11, 2021 6:43PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
heddies will cover their short positions, the price will reach to 700. then you can write that kind of article. you paid mustards!
James Pattison
James Pattison Feb 11, 2021 11:13AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Some one will hold lying jour nalist propagandists responsiblenfor their actions someday
Joel Schwartz
Joel Schwartz Feb 11, 2021 7:35AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
You want to shift some of that blame to the Media or Robinhood?
Don Gamestop
Game_Over_Hedgie Feb 11, 2021 6:41AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Diamond hands
Ross Dre
Ross Dre Feb 11, 2021 6:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It’s too bad, really, that they weren’t able to majorly capitolize on the sheep induced frenzy.
Fomo Yolo
Fomo Yolo Feb 11, 2021 6:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
probably because capitol and sheep are not a great combination as of late
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email