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Why GameStop Shares Tanked Wednesday

By Howard Smith - Mar 24, 2021 at 10:45AM

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A highly anticipated earnings report fell short for the popular meme stock.

What happened

It's been two months since followers of Reddit's WallStreetBets forum turned GameStop (GME -3.56%) into a favorite trading vehicle for retail investors. Last night, the video game retailer reported its first quarterly earnings since volatility in the stock rocketed, and investors -- and traders -- are showing displeasure today. As of 9:55 a.m. EDT, GameStop shares had sunk 18% on the report and associated news. 

So what

While earnings and revenue for the company's fourth quarter ended Jan. 30 slightly missed analyst estimates, investors were more interested in what the company was going to say about its business transformation to using digital channels. The company didn't make any impressive waves on that topic. Maybe more important was something the company didn't say in its release, but did include in an SEC filing. 

red down arrow over $100 bills indicating losing money

Image source: Getty Images.

Now what

GameStop reported that its e-commerce sales jumped 175% in the holiday-impacted quarter. Online sales made up 30% of total sales for the full fiscal year. The transformation away from its brick-and-mortar business model is mainly what retail traders believe can help justify the sharp advance in the company's share price. 

However, in an SEC filing, the company revealed that it may need to raise additional capital to help fund that transformation. Specifically, the company said that "potential costs related to the acceleration of future transformation initiatives" may be funded by sale of additional company equity. 

With the stock closing around $180 per share Tuesday, investors may be wondering why the company didn't take advantage of the spike to $350 per share if it believed it would need to raise capital. Investors are in turn knocking shares down even further today. 

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