How’s GameStop Doing?
Okay I give up: Why hasn’t GameStop Corp. sold a bunch of stock to the Reddit-based retail investors who are clamoring to buy it? We’ve been discussing this question since I first wrote about GameStop on Jan. 25, and last month we got what I thought was a definitive answer: During the big rally of late January, GameStop had too much nonpublic information about its fourth-quarter earnings to do an equity offering, but it had not buttoned up that information sufficiently to disclose it. GameStop’s fiscal year ended on Jan. 30, and by the late-January rally its executives knew a lot about how the quarter had gone. If they did a stock offering without disclosing that information, they’d get in trouble. But the information was still pretty preliminary, and if they did disclose it and it turned out to be wrong, they’d also get in trouble. Rushing to disclose it was too risky. So they did nothing.
Now it’s March! Pre-disclosing earnings in January would have been rushed and risky, but by now GameStop has had a lot of time to get the earnings right. It lost its chief financial officer two weeks ago, which is awkward, but still. On a normal schedule, GameStop will announce earnings in two weeks or so.3 It might have been a good idea for GameStop to spend the last, like, month and a half getting ready to do that a little early, so that it could peel off an at-the-market equity offering whenever it wanted to.
The iron is hot, man:
GameStop Corp.’s latest winning streak has catapulted it to the highest in weeks as Chewy Inc. founder and activist investor Ryan Cohen continued to shake up operations at the video-game retailer, taking retail investors by storm.
Shares of the Grapevine, Texas-based company climbed as much as 19% to $231.74 at 9:36 a.m. in New York Tuesday, extending a winning streak for a fifth day. The gain follows Monday’s 41% climb after the company said Cohen would lead a new committee focused on its digital transformation.
Retail investors’ Reddit-driven frenzy has kept its shares afloat despite the broader market’s recent volatility and tech selloff. The stock has soared as much as 96% over five days. While the Nasdaq 100 fell 11% into a correction yesterday, it has rebounded by as much as 2.9% on Tuesday. Even so, GameStop remains far from its Jan. 28 intraday record of $483.
GameStop closed at $194.50 yesterday; it opened at $217.71 today; it got as high as $244 at 10:39 a.m. At that last price it is up 1,195% year-to-date and has a market capitalization of about $17 billion. At those prices, GameStop should go sell $1.5 billion of stock, travel back in time to December, buy up 100% of its stock and go private. I guess that wouldn’t work. It should sell $1.5 billion of stock, travel forward in time to May, and buy up 100% of its stock? It should sell warrants and puts? I don’t have a good answer, really, but it feels like these are the questions to ask.
Here is GameStop’s press release announcing that Cohen will chair its Strategic Planning and Capital Allocation Committee “to identify initiatives that can further accelerate the Company’s transformation.” Presumably those initiatives will be in the vein of “do more stuff to pivot to online game retail faster,” but the committee does have “capital allocation” in its name. Why not do a billion-dollar at-the-money offering, get a huge mess of capital to allocate and then, I don’t know, buy an electric-spacecraft startup? GameStop arguably has access to capital at some of the cheapest terms in financial history; it seems weird to use that capital sparingly and on video-game retail. People are desperate to buy GameStop shares at any price! Take their money! Live a little!
I tell you what, whether it’s tomorrow or in two weeks, GameStop’s fourth-quarter earnings are going to be the financial event of the season. Will it announce a capital raise alongside earnings? Will the earnings be … good? Could it possibly matter? If GameStop misses estimates by a penny—Bloomberg tells me the consensus is about $1.43 of adjusted earnings per share on about $2.3 billion of revenue—will the whole thing vanish in a puff of smoke? “Sure I have diamond hands but they missed earnings so I’m out.” Somehow I doubt it.
Incentives
Here’s a good article about why corporate treasurers mostly aren’t putting their companies’ money into Bitcoin. One answer, which we have talked about before, is the bad accounting for Bitcoin. If a company buys Bitcoin, it books it as an intangible asset; if the price of Bitcoin goes down, the company writes down the asset and books a loss in earnings; if it goes up, the company does not book any gain. For a volatile asset like Bitcoin, this sort of asymmetric accounting treatment is very unattractive: It probably will go up a lot and also down a lot, which means that you will win some and lose some, but as far as your earnings go you will only lose some.
Another answer, though, is the asymmetric incentives that corporate treasurers face:
“The general consensus among treasurers is that very few of them are going to follow this trend initially,” said Naresh Aggarwal at the UK’s Association for Corporate Treasurers.
“As a treasurer, if I am right and the price doubles, the company may sell its holding and make a profit. Whilst the company may be worth more, it won’t be reflected in my compensation,” he added.
“But if the price falls, I am pretty confident I will be fired. Why bother putting my neck on the line?”