Why is GameStop doing a stock split?

It’s usually big news when a company announces a stock split, but when that company happens to be GameStop Corp. (NYSE: GME) things get downright crazy.

The shares of the extremely popular the meme stock retreated toward $200 on April 1 after GameStop revealed a plan to seek approval for a stock split. While not an April Fool’s joke, retailers were very jubilant about the title sending the unprofitable video game retailer’s valuation back to ridiculous levels. It was another reminder of the disproportionate market reactions that meme stocks can generate.

If the board approves the idea, it won’t be the first time GameStop has done the splits. Fifteen years ago, the company moved to a conventional 2-to-1 split shortly after hitting an all-time high. My, how things have changed.

What drove the stock back then and what does now is night and day. Sales of Xbox game consoles and Super Mario Brothers games don’t matter these days. Instead, social media dictates when GameStop trading goes into overdrive. The last catalyst causes more of the same.

Why is GameStop doing a stock split?

In addition to rousing its passionate retail shareholder base, GameStop is going the spin-off route to make its stock more affordable. It’s often the reason other companies go their separate ways, but with GameStop it has a special meaning.

Following the well-publicized frenzy surrounding the stock after it hit $483 in January 2021, GameStop management understands that it is its loyal retail business executive who moves his stock – not the fundamentals of the business. By reducing the stock price, he hopes to amass even more Reddit and Discord-influenced traders into the GameStop army. In turn, the company’s value will theoretically increase as more and more accumulate in the meme stock.

GameStop takes a slightly different approach to the typical stock split. Rather than simply issuing new shares to investors, the split will take the form of a “dividend”. Not a cash dividend, but rather a stock dividend, which means that shareholders from a certain deadline would simply get more shares. As a result, the number of Class A shares outstanding will increase from 300 million to 1 billion.

It’s really no different than other splits, just a clever marketing tactic to position it as a “dividend” so shareholders feel like they’re being rewarded with some sort of prize. Of course, for a company that posted a loss of $147.5 million in the fourth quarter, there’s not a lot of money to dole out.

How are Meme stocks doing in 2022?

Further proof that there is an ETF for everything these days, the Roundhill Meme ETF is a multi-company meme game rolled into one. The index it tracks, the Solactive Roundhill Meme Stock Index, is perhaps our best guide to meme stock performance.

Although the rise in meme stock began at the start of the pandemic, the Roundhill Meme Index began on December 8 last year. Since then, it has fallen by around 30%. Since the beginning of the year, the group itself has a return of -23%.

The meme trade has shown signs of life in recent weeks. Since March 14, the equally weighted index has risen 25%, led by a 111% increase in none other than GameStop. Big reversals in Affirm Holdings, AMC Entertainment and DoorDash also led the recent load of meme stock.

Does that make GameStop Stock a buy?

So while GameStop’s SEC filing says the purpose of the stock split is to give it “flexibility for future business needs”, in reality, it’s yet another gimmick to entertain. its enthusiastic investor base.

As with other Inventory breakdown, the move would have no impact on the valuation. There would simply be more stocks flying at a lower price. Common corporate practice, however, tends to artificially inflate the value if and when new investors bid on what are perceived to be cheaper stocks.

With GameStop, news of an approved split could very well spark a rally. It doesn’t take much to excite even stock traders. Those who think they were too late for the party before can jump on it. Existing shareholders, especially those in the red, may make the psychologically motivated decision to buy “cheaper” stocks.

A short-term gain following the shared chatter from GameStop seems plausible for traders looking to ride an apparent resurgence in meme stocks. Of course, short sellers will also likely be drawn to the noise looking to capitalize on another bout of emotional trading. And with 20% of GameStop’s near-term float, the scene could once again be set for a high-risk game of cat-and-mouse.