GameStop says its stock went up for no good reason and it's trying to take advantage

Shares of GameStop are down more than 20% in the pre-market as the company joins AMC in using this period of market exuberance to improve its financial position.

The company announced plans to work with Jefferies to sell up to 45 million shares on the open market to raise money. As part of the prospectus supplement, the firm comments on the recent frenzy (emphasis added):

During such period, we did not experience any material changes in our financial condition or results of operations that would explain such price volatility or trading volume. Furthermore, since January 2021 through the date hereof, the market price of our common stock has seen extreme price fluctuations that do not appear to be based on the underlying fundamentals of our business or results of operations. Investors that purchase shares of our common stock in this offering may lose a significant portion of their investments if the price of our common stock subsequently declines.

One question is, what took them so long? It’s the duty of management to obviously run the company well, be operationally sound, look for efficiencies on the cost side and drive growth on the revenue side, and all that. But it’s also their responsibility to make shrewd financing decisions and, perhaps in this case, to have been better prepared for lightning to strike twice.

Both AMC and GME enjoyed parabolic rises in their share prices to open this week; by Tuesday, AMC had taken advantage by issuing more equity to reduce debt. GME may be only able to get in on the game now because it was somewhat constrained by a so-called “blackout period” ahead of the release of its quarterly earnings report, which had been scheduled for June 7. During blackout periods, bringing offerings to market is generally a no-no. One way to get around this is to come forward with your results early.

As such, GameStop also released preliminary unaudited quarterly results for the three months ending May 4, 2024. Though net sales shrank roughly 30% year-on-year, the net loss actually slimmed by about 35% to an estimate of around $32 million for the quarter versus the prior year. Getting these figures together was likely the bottleneck delaying this offering from coming to market.

A second question revolves around whether GME will miss their window of opportunity. This type of frenzy doesn’t come around every day, and in the very short term, both price and volumes are not trending in the right direction.

We can infer that management didn’t necessarily feel an urgent need to sell shares at the start of the month, when the stock was trading around $11 and roughly 4 million shares changed hands, on average, during the month of April.

Just before this offering, shares were trading around $30 in the pre-market, and they’re now much closer to $20. Volumes traded peaked on Tuesday at more than 200 million shares, and dipped to 76 million by Thursday. Options traders who pre-positioned for massive gains in GameStop appear to have been much more nimble and successful in taking advantage of this rally than management.

UPDATE: Added details around “blackout period” constraints ahead of earnings reports.