GameStop shares have attracted world-wide attention due to a speculative growth and hype surrounding the collision of retail investors and investors-beginners Robinhood with large hedge funds. Why doesn’t the company took advantage of this growth in order to sell additional shares and attract investment?
Shares of GameStop (GME) have become the subject of lively debate of stock market analysts, being among the key news Wall Street in recent weeks.
American offline retailer of video games and consoles, GameStop has been the object of a large short sellers, however, because of the mass rates “to buy” on the part of retail investors and investors who are new to these platforms like Robinhood, GameStop shares fell, but on the contrary increased, and short sellers have suffered heavy losses.
From the price to about $17 at the beginning of 2021, GameStop shares has achieved an incredible level of $350 27 Jan (in less than a month), and during the next trading day, the price reached $483 per share.
However, the increase in the shares of GameStop were speculative and real prerequisites for it was not – a network of physical stores suffered losses since its transition to digital sales were very weak, and the competition is very high. More about this Marketinfo.pro wrote in the article “the Wall Street expects a decline in shares of GameStop after a speculative growth of 145%”.
Today, GameStop shares have lost 90% of this growth – the price at the close of trading on Thursday to $53,5, and many analysts do not recommend to keep them.
Looking back on the situation occurred, many have an obvious question: why GameStop did not take this growth, to sell their shares and get a chance to save his fading business.
Many public companies are growth and demand for its shares from investors in these periods, they release additional shares, thus attracting free, no credit, which are used to pay off their debts or investments in the expansion, acquisition, etc.
In contrast to the initial sale of shares during the IPO (initial public offering of shares), which occurs only once at the time of the company on the stock market
such “secondary action” can often issued by a company.
For example, a pharmaceutical company Moderna (MRNA) used the growth of its shares on expectations of investors, prospects for sales of its vaccine against COVID-19 and released a significant amount of secondary shares in may 2020.
In connection with the sharp rise in stock prices in the biopharmaceutical industry, these companies had a lovely time by issuing additional shares to get some much needed money for clinical trials and marketing efforts.
Another example is companies hard hit by the pandemic – so, the cruise company Carnival issued additional shares are not overpriced, but on the contrary, at low prices (stocks fell because of the crisis of a pandemic). However, in this case, the motivation of the Carnival was the payment of current expenses, as the company’s ships remained in the port, revenues fell sharply and was not allowed to cover the costs.
Given the crazy growth of the stock price of GameStop, the release of even a relatively small amount of stock of 1 million could bring to the company hundreds of millions of dollars to strengthen the balance sheet, to create opportunities for e-Commerce, and more.
According to reports, the company GameStop, indeed, filed to sell shares worth up to $100 million, however, the Commission on securities and exchange Commission (SEC), probably rejected it.
The fact that such a secondary placement is a huge risk for investors. After a sharp speculative growth stocks can follow the same strong fall.
A similar precedent was the case of Hertz Global Holdings, when in June 2020, the SEC has taken similar action by stopping the secondary offering of shares of large companies rent a car.
Shares of Hertz jumped, despite the submission of an application for protection from bankruptcy that left very little chance for shareholders to return anything in the long run. In an effort to do everything possible to repay the debt, Hertz sought to sell the stock at inflated the price. Later, after reviewing SEC, Hertz has abandoned these plans.
A huge responsibility
The reason for the refusal, as in the case of Hertz, and in the case of GameStop is the consequences that may occur for companies after this secondary offering of shares.
No matter how clear GameStop stated that his actions were unreasonably priced, investors would have returned and filed lawsuits against the company when the stock price fell. The resulting hassle, the costs and the poor reputation would not go to the benefit of GameStop.
Interestingly, the company AMC Entertainment Holdings (AMC) who find themselves in a similar situation, ultimately conducted a secondary offering of shares. However, AMC has received only about $5 per share when placed, well above its price of $2 per share compared with the previous year, but well below its peak level of $20 per share. Until now, the stock price of AMC remained above this level of $5, but if it falls further, it will be interesting to see how will react “deceived” investors.
So far, analysts see little opportunity for continued significant growth in shares of GameStop, even the real prerequisites to growth can cause a negative bias for some investors.
The Motley Fool