GameStop Stock Shock: The Meme Dream Turned Dilution Nightmare

Stocks to sell

GameStop (NYSE:GME) pulled a fast one on investors. Originally scheduled to report fiscal first-quarter earnings on Tuesday, Jun. 11, the video game retailer reported results early. It released the results last Friday in an attempt to sandbag investors. The clock is ticking on GameStop stock, though.

Reporting poor earnings ahead of the weekend is a common tactic used by companies wanting to minimize bad news.

GameStop’s results were as bad as expected. Sales fell 28% to $882 million, which was the midpoint guidance it gave last month. Net losses of $32.5 million also hit the exact midpoint of its forecast.

But since we already knew that was coming, why push the report forward? So GameStop could gut-punch shareholders again with yet another stock sale. The maneuver shows just what management thinks of its shareholders.

You can’t trust the video game company to have its owners’ interests at heart, so if you’re still holding the stock, sell it now.

Take the Money and Run

GameStop stock soared in recent weeks as meme lord Keith Gill, otherwise known as Roaring Kitty, returned to social media to fuel optimism among the stock’s traders.

First posting nothing more than a picture of a gamer leaning in toward a screen, GameStop stock tripled in value. He followed that up by posting pictures suggesting he owns a massive stake in the company or some 5 million shares. 

GameStop used the opportunity to sell shares and raised some $933 million. On the day GameStop reported earnings, Gill was scheduled to hold a livestream event.

It is quite possible the video game retailer hoped to capitalize further on the meme stock frenzy surrounding his stream. By releasing earnings early and announcing a new stock sale on the same day, GameStop likely hoped to scrape additional gains from the event.

Indeed, action on GME shares was so wild trading had to be halted 17 different times as trading circuit breakers kicked in. But not even Gill could keep the rally going. GameStop stock ultimately plummeted to close out the day down 39%.

Although Gill says he still likes the stock, you shouldn’t.

A Tsunami of Dilution is Coming

This is going to be as good as it gets. The video game retailer continues signaling its business is worsening. The earnings report drew a line underneath that dismal fact. 

Despite losses being narrower than the year-ago period, GameStop is not getting any closer to break-even status, let alone turning a profit regularly. The new stock sales is just a further cash grab.

The damaged video game retailer said it agreed to sell up to 75 million shares of its stock to investment banking and capital markets firm Jefferies (NYSE:JEF). It would be under the same open-market sale agreement GameStop previously sold 45 million shares through.

GameStop’s charter authorizes it to issue as many as 1 billion shares of common stock and up to 5 million shares of preferred stock. With over 306 million shares outstanding, GameStop investors can expect to see their stake in the company heavily diluted over time. 

A Small Fish In a Shrinking Pond

The video game industry is in a secular decline. Sales across all of GameStop’s segments are falling. It ended 2023 with hardware sales down 5%, software sales 16% lower and collectibles saw 22% of its sales evaporate. They continue to be in free fall now.

Hardware sales tumbled 30% in the first quarter to $505 million, software was down 29% and collectibles lost 21%. There is no reason to expect the carnage to end.

Sony (NYSE:SONY) forecasts unit sales of its PlayStation 5 game console will fall to 18 million units this year, down from 20.8 million a year ago and significantly below its earlier projections of 25 million units. It is laying off 900 workers in its gaming unit.

GameStop won’t see any gains in software sales either. Take-Two Interactive Software‘s (NASDAQ:TTWO) Grand Theft Auto VI release is delayed and might not come out until 2026.

Microsoft (NASDAQ:MSFT) is releasing Call of Duty: Black Ops 6 straight to its Xbox Game Pass subscribers. That alone could upend how the video game industry works.

Waiting For the End

To his credit, Gill told his livestream viewers, “My aggressive style of investing is almost always not suitable for y’all.”

Yet he also said his investment thesis was a bet on CEO Ryan Cohen’s transformation of GameStop. There is little basis to believe in it.

Although Gill pointed to the video game retailer’s cash position, that has come at the expense of shareholders. The company’s business is rapidly deteriorating.

There is zero to commend GameStop as an investment. Avoid GameStop stock at all costs. Take whatever profits you made and run.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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