GameStop slides after announcing debt issue to buy bitcoin

Shares of GameStop (GME) are under pressure on Thursday, reversing course after rallying on Wednesday, following the company’s announcement that it plans to raise debt to buy bitcoin. Commenting on the news, Wedbush said it was hard to understand why any investor would be paying more than 2-turns cash value for the potential for GameStop to convert that cash into Bitcoin, and that it expects the offering to fall flat. 

RESULTS: GameStop reported fourth quarter results on Tuesday. For the quarter, the company reported adjusted EPS of 30c, versus 22c last year, and revenue of $1.28B, with was worse than the expected $1.48B. Cash, cash equivalents and marketable securities were $4.78B at the close of the quarter. The company also announced that its board has unanimously approved an update to its investment policy to add Bitcoin as a treasury reserve asset.

OFFERING: GameStop announced that it intends to offer, subject to market conditions and other factors, $1.3B aggregate principal amount of 0.00% convertible senior notes due 2030 in a private offering to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. GameStop expects to use the net proceeds from the offering for general corporate purposes, including the acquisition of Bitcoin in a manner consistent with GameStop’s Investment Policy.

Commenting on the proposed private offering of convertible notes, Wedbush notes that Underperform-rated GameStop will be using the net proceeds from the offering for general corporate purposes, including the purchase of Bitcoin. The company intends to let its stock float until pricing. Investors purchasing the bonds will be paying a large premium to GameStop’s assets, the firm notes. Wedbush believes GameStop is following the Strategy (MSTR) playbook, but Strategy currently trades at less than 2-turns the value of its Bitcoin holdings. 

Wedbush is uncertain whether there will be much uptake on the offering, as the company may get caught up by the “qualified” investor requirement. The firm finds it “hard to understand why any investor would be paying more than 2x cash value for the potential for GameStop to convert that cash into Bitcoin,” particularly since the same investors can invest in Bitcoin or a Bitcoin ETF themselves. Currently, GameStop’s entry into the trading card business seems to be the only recent business venture to see modest success. In contrast, its NFT marketplace strategy has struggled to gain traction. That said, despite a complete lack of articulated strategy, “GameStop has consistently been able to capitalize on the existence of ‘greater fool’ willing to pay more than twice its asset value for its shares-and so far, they’ve been right,” says Wedbush. The firm expects the offering to “fall flat.”

PRICE ACTION: In Thursday morning trading, shares of GameStop have dropped about 12% to $25.02.