What are the implications for GameStop as a company in the aftermath of the current share price surge?

Question

The way that the current short-squeeze of GameStop stock works has been well covered elsewhere and the position of the two investment sides has also been quite clearly documented, but what impact is it likely to have on GameStop as a company in the medium-term and what can they actually do about it?

The board of directors must be well aware of what's happening, but what actions can/should they take given they are currently running a company which (likely has) hugely inflated value. What are the implications for future dividend payments, raising of debt/equity, medium-long term financial planning? Is this likely to harm/help the business relative to it's recent position of (likely) being undervalued and heavily shorted?

NB I am not looking to invest/not in the business; I'm just curious to know what it'd be like to be on the board at the moment, and how a company could move on from the current, highly unusual, circumstances.

Answer 1

A company's share price typically has 2 impacts on its internal operations:

(1) If it needs additional funding to accomplish its goals [like expanding to new locations], then it could do that by (i) waiting for accumulation of net earnings to fund expansion; (ii) take on more debt; or (iii) offer additional equity [like more shares offered to the market].

When offering new equity, consider - offering an extra 20% of additional shares decreases the proportionate ownership of the old shareholders, but the extra money coming in makes the pie bigger. In theory, offering new stock should basically keep old shareholders at the same amount of value owned [omitting transaction costs and volatility of hype around new projects]. However, if the company's management believes that the stock market reflects a very high share price relative to what management believes it should be worth, then it might be able to 'cash in' on that by offering shares for this funding.

So if the GME price increase lasted long enough to be acted on by internal management, they could put out a share offering at, say, $100 / share, let's assume doubling the total shares outstanding. If the old share value of ~$20 / share was a more realistic evaluation of the company's future profits, then GME basically added value to old shareholders, who would be getting a pie that would be about 2.5x bigger [$20 / share vs $100 / share, for the new 'half' of the company's equity], and only losing 50%, increasing the value the old shareholders hold. So, this would be acting in the interest of current shareholders if it was possible*.

*Note that this isn't likely possible, as the bubble is likely to burst on GME's current run within maybe days or weeks, and it could take months to get everything prepared to do a share offering. Keep in mind also, that GME has lost money every quarter from its operations, over the last 2 years. So an influx of cash might not even help it survive.

(2) If a company has an employee stock option program or similar, then a rising share price might change the incentives of key individuals to stick around. Of course, if it seems like a big bubble and an employee is legally able to sell, this also might create a risk that such an employee would just 'cash out' and leave.

In short, share price movements can impact the internal workings of a company, but this high level of volatility that is likely to end quickly doesn't have a big predictable outcome.

Answer 2

They had a lot of free advertisement on the international press and the web.

People like me, who never heard of GameStop before, now know what they sell (used games, consoles, etc.), how they do it (at physical stores, but planning to sell more online), that they have many fans, the usual value of their stock, that they are having to close stores, and much more.

That should count for something.

Answer 3

The fundamental value of GameStop hasn't changed at all, so let's assume it is $20 per share. What you have to pay to get one share has changed dramatical, say $100 per share.

So GameStop could issue say 20% new shares. In normal times they could sell them for $20 per share, increasing the fundamental value by 20% and the number of share holders by 20%, so no effect on the share holders. But if they managed to sell these 20% of shares for $100 each, they would double the fundamental value of the company while increasing the number of shareholders by 20%, so a good deal for the company which would have plenty of cash in the bank, and for the shareholders.

On the other hand, the current short squeeze means that normal shareholders who had nothing to do with all this weird business can sell their shares with a huge profit. And issuing shares would affect the short squeeze, so that way the shareholders would lose out.