GameStop Should Sell Stock ASAP

GameStop GME shares have held up extremely well after its earnings announcement a week ago given that the company didn’t take any questions on the conference call and announced in its 10-K filing that it may sell shares.

After falling from $181.75, the close before the announcement, to $120.34 the next day, it immediately rallied the following day to $183.75 erasing all its losses (even after dropping to $116.90). And while it was very volatile on the third day, trading between $163.26 and $218.93, it closed at $181.

With the stock up 862% to $181.30 this year from $18.84, the elevated stock price provides management the opportunity to raise a significant amount of cash with very little dilution. It makes perfect sense for the company to sell shares.

$146.7 million in debt coming due this year

GameStop had $146.7 million debt coming due this year as of January 30 but paid off essentially half of it, $73.2 million, on March 15 using cash on hand. It had $508 million un-restricted cash on January 30.

Of the remaining $73.5 million, $48.6 million is owed to its French subsidiary, Micromania SAS, where it pays 0% interest. This debt can be extended until 2025 but the interest rate could increase. The remaining $25 million is revolving credit expiring in November 2022.

Long-term debt interest rate is 10%

When a company is not doing well it can wind up paying a much higher interest rate than a healthy company. The bulk of GameStop’s long-term debt consists of $216.4 million, 10% interest rate notes coming due in March 2023, just two years away. By paying this off early, as long as there aren’t any large pre-payment penalties, the company could save $21.6 million in interest costs or almost $0.31 in EPS. Note that GameStop paid $34 million in interest cost last year.

Selling stock may hardly create much dilution

GameStop’s shares are up 862% year-to-date with them at $181.30. If the company wanted to raise enough money to pay off the $216.4 million of debt costing it 10% per year and not worry about having to refinance it, the dilution would hardly be noticed. Assuming the company would have to discount the shares to sell them, it would take the following number of shares and the resulting dilution.

• At $140: 1.55 million shares for 2.2% dilution
• At $150: 1.44 million shares for 2.1% dilution
• At $160: 1.35 million shares for 1.9% dilution
• At $170: 1.27 million shares for 1.8% dilution

Selling shares could put pressure on the stock. If it were to fall a significant amount the dilution would still not be dramatic.

• At $100: 2.16 million shares for 3.1% dilution
• At $110: 1.97 million shares for 2.8% dilution
• At $120: 1.80 million shares for 2.6% dilution
• At $130: 1.66 million shares for 2.4% dilution

If the company wanted to raise $100 million in additional cash this is the number of shares it would have to sell and the dilution.

• At $100: 1 million shares for 1.4% dilution
• At $110: 909 thousand shares for 1.3% dilution
• At $120: 833 thousand shares for 1.2% dilution
• At $130: 769 thousand shares for 1.1% dilution
• At $140: 714 thousand shares for 1.0% dilution
• At $150: 667 thousand shares for 1.0% dilution
• At $160: 625 thousand shares for 0.9% dilution
• At $170: 588 thousand shares for 0.8% dilution

Because the valuation numbers don’t make sense

Before Covid-19 derailed the U.S. and worldwide economies GameStop was slowly losing revenue from fiscal 2016 to 2018 then had a sharp drop-off in fiscal 2019 (ended in January 2020). GameStop may be able to shake up its business enough to recover at least some of downturn but it won’t happen overnight.

• Fiscal 2016 revenue: $8.6 billion
• Fiscal 2017 revenue: $8.5 billion
• Fiscal 2018 revenue: $8.3 billion
• Fiscal 2019 revenue: $6.5 billion
• Fiscal 2020 revenue: $5.1 billion
• Fiscal 2021 revenue: $5.43 billion estimate
• Fiscal 2022 revenue: $5.37 billion estimate

Note that while GameStop’s fiscal year ended on January 30, 2021, and would normally be labeled fiscal 2021, GameStop calls it fiscal 2020.

When calculating the company’s valuation metrics these results use fiscal 2018’s $8.3 billion in revenue so as to be as generous as possible.

• At Monday’s close of $181.30
• Market cap of $12.3 billion
• 9.6 times greater than December 31, 2020’s market cap of $1.3 billion
• 1.5x market cap to fiscal 2018’s revenue
• vs. 0.15x at December 31, 2020

Due to the huge spike in GameStop’s shares and the resulting bubble valuation metrics, it makes perfect sense for the company to sell shares and put itself on stronger financial footing.