It has been a while since I last covered GameStop (NYSE:GME). The original meme stock from the pandemic has shown over the years just how powerful a group of retail investors can be. It’ll also likely be studied in the future as a prime example of what a short squeeze is. Yet news is now being generated around the GameStop stock split. So what do I need to know here?
The story so far
GameStop is a consumer electronics retailer based the US. The declining demand for traditional store-based video games and films meant that the share price had been falling in the years leading up to the pandemic.
There was a large amount of short interest, referring to investors that are looking to profit from a fall in the share price. Shorting a stock can be done by borrowing the share from an existing shareholder with the aim of buying it back later at a lower price. The difference between the initial price and the price when it comes to buying it back is the profit generated.
Given that the potential loss on shorting a stock is unlimited (the share price could surge to infinity), GameStop shares saw large volatility as retail investors piled in and bought the stock. This caused other investors who were short to hurriedly buy back shares, further pushing the price higher.
Details of the GameStop stock split
Rumours about a stock split have been in the market since the start of the year. Given that the price is still elevated at $128, a stock split will cause the price to fall. This should make it more attractive for retail investors to buy, as would be cheaper.
A stock split has no fundamental impact on the value of a company. In the case of GameStop, for every one existing share held, three new extra shares will be given. As a result, the number of shares in circulation increases massively. This causes the share price to fall, but the market capitalisation will stay the same. At a simple level, one share worth £100 gives the same value as 10 shares trading at £10 each.
The extra shares will be given out in two weeks time.
Should I get involved?
Despite the buzz around the stock split, it doesn’t change the value of the company at all. Sure, historically, split at other large companies contributed to short-term rallies. It’s also good news for retail investors to be able to afford the stock. But for me, I don’t see any value here.
The business is trying to pivot to more online sales and is also trying to get involved in the NFT space. But as we currently stand, I’m not interested in buying shares in an outdated electronics retailer.
Even with the share price down 33% over the past year, it’s up over 30 times over two years. I struggle to be able to see how this is fundamentally sound for the long term. On that basis, I’m staying clear.
