We can disagree as to whether or not history will be kind to the GameStop (GME 3.77%) saga, but one thing that bulls and bears can probably agree on is that the struggling video game retailer blew a golden opportunity to sell freshly minted shares at elevated prices late last month. It's a mistake that will loom large in a couple of years -- if not sooner -- when the well is running dry.
Bears can argue that GameStop's inability to prop up its cash position will shorten its lifeline. Bulls can point out that arming itself with more dry powder would've given it more optionality in exploring potential second acts. Reuters is now shedding some light as to why GameStop didn't pull the trigger on a secondary offering in the middle of the frenzy, and apparently it had nothing to do with the retailer's board worrying about letting the air out of the inflated balloon too soon. I'm going to argue that it's still not too late to do the right thing.
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Playing to win
Three unnamed sources familiar with GameStop's internal deliberations are telling Reuters that regulatory restrictions kept the chain's braintrust from raising money when the stock was soaring. The timing was lousy for the rally, as its fiscal fourth quarter ended in late January. Executives apparently already had compiled data to give it a reasonable snapshot of how the pivotal holiday-containing quarter played out.
Class-action lawsuits and regulatory agencies would've had a field day if GameStop had sold shares during the mania's peak only to put out an abysmal quarterly report a few weeks later. A workaround was as simple as putting out a preliminary financial update, but a bad report then could've also popped the rally short.
Timing is everything on Wall Street. The same people arguing that GameStop missed a golden opportunity to shore up its finances at a sky-high valuation two weeks ago are also critical about AMC Entertainment Holdings' (AMC +0.00%) recent stock sale. The market initially praised the multiplex operator for raising nearly $305 million early in its rally, but then it went to the ticker tape.
AMC's stock sale came when the country's largest movie theater chain's stock was at $4.81. Two trading days later it peaked shortly after cracking the $20 ceiling. The same number of shares it issued could've raised $1.2 billion at the peak. It was a $900 million mistake by AMC. Or was it? The money raised will buy it at least a couple more months in the new normal.
AMC sold its shares too early. Who cares if GameStop sells too late? AMC shares are still trading a bit higher than its late January stock sale, but this was also a stock that began the year at less than half of its equity offering price.
GameStop closed just above $50 on Wednesday. Even if it continues to drift lower to $40 in the coming days -- and drops to $30 on a lousy quarterly report -- GameStop still began 2021 trading in the teens. Sure, GameStop commanded a ridiculous $33.7 billion market cap when diamond hands turned to paper two weeks ago. Now at a $3.6 billion valuation it's still likely overvalued based on fundamentals instead of emotions or the theatrics of derivatives. It was at $1.3 billion when the year began, and a third of that at the start of last year.
Selling shares now will provide a mattress when reality kicks in at a lower price point. Net sales still fell for the quarter, and the PS5 rollout that will make the top-line slide seem acceptable will be gone on the bottom line since consoles represent the absolutely worst margins in the GameStop business model. Right now it's a poorly positioned retail stock with a still-buoyant share price.
GameStop still needs money if it wants to keep dreaming a little longer. This is no longer the cash-flow beast it was in its prime. Reinvention takes time and money. A stock sale sooner rather than later will be the currency that buys it both of those things.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
