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GameStop Just Turned the Corner, and It Has the Stock Market to Thank

By Dan Caplinger – Jun 22, 2021 at 12:15PM

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The latest from the video game giant shows how institutional investors are buying into the meme stock.

The stock market continued to move toward record highs on Tuesday morning, and market participants could find signs of bullish sentiment just about everywhere. Major market benchmarks gained ground, with the Dow Jones Industrial Average (^DJI -1.62%) moving higher by 41 points to 33,918, the S&P 500 (^GSPC -1.72%) picking up 12 points to 4,237, and the Nasdaq Composite (^IXIC -1.80%) rising 37 points to 14,179.

Yet perhaps the biggest sign of just how much things have changed on Wall Street came from GameStop (GME 1.38%). The wildly popular video game retailer has been the subject of scorn and ridicule among many of those who follow the company, but GameStop has generated enough enthusiasm about its plans to reinvigorate its business that it's getting buy-in not just from retail investors, but from the big institutions that were so convinced of its imminent demise just months ago.

Another big win for GameStop

GameStop shares were up more than 5% on Tuesday morning. That helped solidify the stock price above the $200 per share mark, and although that's down significantly from its best levels of a couple weeks ago, it nevertheless reflects an important milestone in establishing what major investors were willing to pay for newly issued shares of the video game retailer.

An adult and two children playing video games on a couch.

Image source: Getty Images.

GameStop had announced in early June that it would seek to take advantage of its heightened stock price to raise more capital. The company gave notice of its intent to offer 5 million shares in an at-the-market offering, giving GameStop the flexibility to sell shares on its own terms when market conditions were at their best.

It only took GameStop a couple weeks to move forward with its plans to raise capital, but its efforts were a huge success. On Tuesday, GameStop announced that it had raised $1.126 billion in selling 5 million shares through its offering. That works out to an average price of $225.20 per share -- above where the stock currently trades.

That was even better than GameStop had managed in a similar offering a couple months before. In April, GameStop gave notice of its intent to sell 3.5 million shares. It ended up raising $551 million in that offering, for an average stock price of around $157 per share.

Institutional investors are jumping in

Retail investors have gotten a lot of the credit for GameStop's huge rise. Yet at some point, Wall Street institutions have to step in if the stock is to sustain its gains. Given the size of GameStop's offerings and the ease with which capital markets are absorbing additional shares, that moment appears to be now.

Some activity is likely coming from anticipated moves in key indexes. It appears likely that GameStop will graduate from the small-cap Russell 2000 Index and move into the large-cap Russell 1000 Index. That might seem like good news, but it actually might prove to be a net negative in terms of how much institutional capital needs to go toward owning GameStop stock. GameStop has a much larger weight in the Russell 2000 than it will have in its large-cap counterpart, and that could actually cause net selling among index-tracking institutional investors if the move goes forward as planned.

Offerings the size of what GameStop just sold typically put huge downward pressure on a stock price. The fact that GameStop shares remain far, far above where they traded just months ago shows that the company's turnaround strategy has the confidence of a critical mass of investors. That bodes well for the stock being able to hang onto its gains as long as its business strategy keeps making progress.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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