Video game retailer GameStop (GME 1.07%) announced a stock split after the market closed on Thursday, March 31. Typically, you see stock splits from companies that have share prices in the thousands of dollars; it was surprising to see one coming from GameStop, selling at $165 per share as of today's market close.
Stock splits usually create a lower nominal stock price, making it more attractive and affordable for retail investors. Never mind that most brokerages allow for fractional share purchases; some investors might be unaware of that feature. The stock rose over 10% on the initial news but gave back most of those gains on the day following the announcement. Let's look closer at GameStop's stock split and whether investors should buy the stock now.
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GameStop announces stock split
Interestingly, GameStop's stock split will not be instant. In a statement dated March 31, the company said it would seek shareholder approval on a plan to increase its authorized share count from 300 million to one billion to implement a stock split. It also says the company will aim to gain shareholders' approval for a new compensation plan using equity issuance.
Of course, GameStop is infamous for kicking off the meme stock frenzy of 2021. The company attracted the attention of a large group of retail investors who encouraged each other to buy more of the stock and hold it until it reached astronomical levels. The investors successfully pushed the share price of GameStop to over $300 per share before it came crashing down to below $100, recently gaining momentum and rising to $165.
It remains uncertain whether this group of shareholders will approve the new stock issuance and split plans. Regardless, a stock split has no impact on a shareholder's ownership percentage. If you own 30 shares of a company with 100 total shares outstanding, you own 30% of the business. If that company issues a 10-for-1 stock split, you now have 300 shares of a business with 1,000 shares outstanding -- still 30% ownership.
This is no reason to buy GameStop stock
The stock split does not change that GameStop is in a declining business. The core of its business is buying and selling physical video games, while gamers are buying games digitally. Over its last four fiscal years, GameStop has generated a loss per share of $6.59, $5.38, $3.31, and $5.25. Meanwhile, sales have declined from $8.3 billion to $6 billion in that same time.
Enthusiasts will argue that the company is making investments to turn things around and changing the business model to better align with today's gamers. However, there is no certainty that the shift will be successful, and the company still has thousands of brick-and-mortar stores selling physical copies of games.
To make the stock even less appealing, it is trading more expensively because of the meme stock frenzy. GameStop is selling at a higher price to sales than Walmart, Target, Costco, and Lowe's, which are brick-and-mortar businesses with better prospects on the top and bottom lines in the near and long terms.
To answer the question in the headline: No, investors should not buy GameStop stock after it announced a stock split.
