The real problems with using GameStop shares to try to purchase eBay

GameStop’s (rebuffed) bid to purchase eBay is famously half cash/half stock.

So, in order to try to evaluate whether eBay shareholders might like this deal or not, it helps to have some thoughts about what gives GameStop shares their value.

The three things that I believe help explain why the video game and collectibles retailer's shares trade where they do (to varying degrees) are:

1. GameStop enjoys a “meme premium” 

2. GameStop deserves a higher valuation in 2026 versus 2019 because it’s been a better-run company under Ryan Cohen

3. GameStop bulls expect Ryan Cohen to do something transformative with the cash at his disposal
   

Let’s unpack:

GameStop went from perceived obsolescence to a market cap of $24 billion in a few months based on retail enthusiasm and a short squeeze. Shares mooned again when the messiah of the movement, Keith Gill, returned to the scene in 2024 with a thesis that was wildly different from his original iteration, but still with a cult following that had kept its passion burning for three years and counting. The willingness of retail traders to support the company has produced eye-popping short-term upside in two instances, during which management raised more than $5 billion in cash. That’s right-tail risk up, left-tail risk down. An “earned” meme premium, one could say.

Ryan Cohen’s operational tactics have tamped down on left-tail risk. The retailer generates free cash flow under his leadership more consistently than it ever has. Cohen’s continuing to close locations that don’t offer enough bang for the buck, while selling, general, and administrative expenses are down materially: 

As for the transformational aspect, well, I’ll turn it over to Keith Gill, aka @TheRoaringKitty, to the argument on how that’s been a longstanding pillar of the bull case:

“If you remember my previous thoughts on the company and the opportunity, there was kind of like a two-part thesis to it, and that second part of the thesis is a reinvention of the business model or a transformation, whatever you want to call it,” he said during his infamous June 2024 livestream. “It becomes a bet on the management, in particular, of course, Ryan fucking Cohen.”

In financialese, this is a way of saying that the option value that GameStop bulls ascribe to the cash on its balance sheet is high.

How might these factors be influenced by a GameStop-eBay union?

The Meme Premium

Is it easier to meme a small stock or a big stock? This is not a trick question. It's easier to meme a small stock, and combined eBay-GameStop would not be small. Right tail risk likely goes down. At the same time, the debt incurred to consummate this deal pushes left-tail risk up.

And simply, the number of deathly loyal shareholders likely stays the same in the joint entity, but the share of the company that they own goes down.

Captain Cohen

This is where the benefit lies, if you trust Cohen as an operator. The nature of the GameStop business has probably forced him to focus a little more on the expense side than growth, but let’s not forget that this is also the man who built Chewy. In unpacking what he’d do for eBay, however, the firmest part of Cohen’s pitch is cost cuts at eBay, rather than wide-ranging synergies that allow for expense reductions. Of course, it’s harder to precisely map out the financial benefits on how GameStop’s brick-and-mortar locations might bolster eBay’s growth, but that’s probably a case he’ll need to continue making to win hearts and minds.

As Bloomberg’s Matt Levine put it (and I largely agree!), “GameStop is really offering eBay shareholders nothing except Cohen.”

Unfortunately, Cohen’s day-to-day operational abilities don’t seem to be something the market has been focused on during his time at GameStop. There’s been no gradual re-rating of the stock commensurate with the firm’s return to being cash-flow-positive, or seeing its collectibles business boom.

The meme is the easy part, the execution is the hard part. Ask Plug Power investors. Ask Opendoor investors. And what’s worse, sometimes even when you do turn the business around, people still don’t care! It’s tough to graduate from having a cult following to mass appeal.

Transformation

Here’s what really hurts the case, in my view. To the extent that GameStop bulls were long the stock because Ryan Cohen could do something “genius or totally, totally foolish,” they were already pricing in the benefits of a successful acquisition! 

Now, that might not matter much in a world where GameStop was using cash alone to swallow up another company — many of the targets Michael Burry had recommended fit such a description, for what it’s worth. Alas, transactions in which the lion’s share of the consideration was cash might not be considered transformational.

This one certainly would be, which brings about this problem: Using GameStop shares whose value is inflated by the prospect of a transformative acquisition is like selling a used, scratched Pokémon card and trying to pass it off as a PSA grade 9.

The original owner got to enjoy the product at its best; the new ones don’t get all the same benefits.