Let’s talk about meme stock, GameStop (GME) and its recent big move. The company managed to raise nearly $933.4 million by selling 45 million shares.
The news sent its shares up over 12% after the bell on Friday. But before we get too excited, let’s dive into what’s really going on here.
First off, to get that $933 million, GameStop had to dilute its shares.
What does that mean? Well, dilution happens when a company issues more shares, which can reduce the value of the shares that are already out in the market.
Usually, this isn’t great news for shareholders because it means their slice of the pie gets smaller. Yet, GameStop’s stock price still went up.
GameStop, which mainly relies on its physical stores, has been struggling as more customers turn to e-commerce for buying video games and collectibles.
Earlier this month, the company announced its share sale plan amidst a buying frenzy spurred by Keith Gill, also known as "Roaring Kitty" on social media. If you remember, Gill’s bullish calls on GameStop played a huge role in the 2021 meme stock rally. His recent activity on social media has re-awakened interest in the stock.
The shares were sold through an "at-the-market" offering, meaning they were sold into the market at the current market price, rather than a set price as you might see during an IPO.
Based on calculations, these shares were sold at an average price of $20.74 each, while the stock was trading at $21.93 at the time of the announcement. Despite this dilution, the stock price jumped, which doesn’t really add up given GameStop’s ongoing struggles, plus the effects of dilution.
Our own Jeffry Turnmire explains that the company’s board had a fiduciary duty to raise money while the stock price was higher than what its fundamentals would justify.
Essentially, they had to take advantage of the high stock price to secure much-needed funds for general corporate purposes.
But let’s not forget that GameStop recently said it expects its first-quarter net sales to drop to between $872 million and $892 million, compared with $1.24 billion a year earlier. That’s a significant drop in revenue, highlighting the challenges the company still faces.
Interestingly, this isn’t just a GameStop thing. Theater chain AMC, another favorite among retail investors, also completed a $250 million "at-the-market" share sale program last week. Both companies are leveraging the retail investor interest to bolster their financial positions despite their struggles.
In a nutshell, while the initial market reaction to GameStop’s stock sale was positive, the company’s fundamental issues and the dilution of shares suggest that investors should be cautious.
The board’s decision to raise funds while the stock price is high is smart, but whether this strategy is sustainable in the long run remains to be seen.
Meanwhile, Jeffry Turmire tells us that GME entered a “rocketship setup” pattern. It’s a combination of his proprietary Market Roadmap setup, plus a measured bounce.
Right now, everything hinges on GME holding above the Roadmap LIne, which is currently around the 15 to 16 range.
A breakdown below that invalidates the pattern, but if it holds and goes above resistance at about 25, the pattern supports a move to as high as 80 or even an astronomical 300.
Jeffry himself only has 12 shares, so he’s not playing big. Trading a meme stock like GME might be fun, but it could easily end in disaster. So be very careful if you decide to trade this.
And be sure to set your sell orders in advance — take a look at a chart of GME and notice how the spikes it has experienced in the past happened lightning fast.
But keep an eye on those key levels — until one of those levels gets breached there is no high-probability play.
— The Prosperity Pub Team
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