Share prices of video game retailer GameStop (GME 7.58%) surged 15% on July 7 after management announced a 4-for-1 stock split of the company's Class A common stock.
In simpler words, GameStop shareholders of record on July 18 will receive three additional shares for each share of the company that they own following the close of trading on July 21. GameStop stock will start trading on a split-adjusted basis on July 22.
This makes GameStop the latest company to join the stock-split bandwagon. It is also worth noting that the shares have received a nice boost thanks to this move after underperforming the broader market for most of the year.
But should investors buy GameStop based on this split? Let's find out.
The stock split doesn't change anything for GameStop investors
A stock split is a purely cosmetic move that doesn't do anything to change the fundamentals of a company. It simply increases the number of shares outstanding and reduces the dollar value of a company's stock price.
However, there is a perception that the lower dollar value following a split means that shares are now available to a wider pool of retail investors. As a result, the demand for shares could go up and send prices higher. This is probably the reason why the market got excited following the announcement of GameStop's stock split.
But investors shouldn't forget that GameStop's fundamentals and prospects remain the same as before. Additionally, a split isn't a guarantee of higher stock prices. Major companies with solid growth prospects haven't seen a bump in their prices following stock-split announcements. That's why an investment in GameStop shouldn't be based on a stock-split move. Instead, investors should closely scrutinize what the company's future may look like.
Should investors buy the stock?
GameStop is a specialty retailer that sells new and pre-owned video games, gaming consoles, collectibles, and peripherals such as gaming controllers, headsets, and other accessories through its 4,500-plus stores and e-commerce platform.
The retailer has been trying to reposition its business amid declining sales of physical games and the increasing popularity of digital downloads. That's not surprising, as the number of physical video game titles available for sale dropped from 321 in 2018 to 226 in 2021. Meanwhile, the number of video game titles distributed digitally was up to 2,182 last year from 1,362 in 2018. The digital distribution channel reportedly accounts for 90% of new console gaming titles, according to technology website Ars Technica.
These reasons explain why GameStop's business has been in a state of decline for a long time now.
GME Revenue (TTM) data by YCharts.
The company's results for the first quarter of fiscal 2022 (for the three months ended April 30, 2022) weren't impressive, either. GameStop reported $1.38 billion in quarterly revenue, representing an increase of 8% over the prior year. However, a closer look indicates that GameStop's reliance on hardware sales is turning out to be a headwind.
Hardware and accessory sales accounted for 49% of GameStop's top line last quarter. The segment's revenue was down 4% year over year. Meanwhile, GameStop's adjusted net loss shot up to $158 million, or $2.08 per share, in fiscal Q1 from $29.4 million, or $0.45 per share, in the prior-year period. Of course, the company is trying to diversify its business by moving into new verticals such as a digital wallet that will allow gamers to receive and send non-fungible tokens (NFTs) and cryptocurrencies. But it remains to be seen how these efforts play out in the long run.
Investors should also be concerned about the market's low expectations for GameStop. The company's losses are projected to increase at an alarming annual rate of 48% over the next five years. Its median price target of $110 on Wall Street points toward a drop in the stock price. All told, GameStop looks like a stock-split play that investors may want to avoid.
