GameStop's (GME -5.13%) stock split announcement finally dropped. Investors have been waiting since March for the move after the video game retailer dramatically increased the number of shares outstanding from 300 million to 1 billion with the goal of splitting the stock.
The shares will split by a four-to-one ratio, meaning for every share you own, you get three more, but each one will be worth one-fourth the price they previously traded at. So, with GameStop recently closing around $135 per share, an investor with 10 shares will now own 40 stubs instead, but each will be worth only $33.75.
Unfortunately, the "mother of all short squeezes," or MOASS, that meme stock traders have been waiting for still will not happen. Just because GameStop's split will be in the form of a "dividend" doesn't mean there will be any special impact on short-sellers. Yes, they'll have to buy back four times as many shares, but they'll be priced lower, just like investors who are long on the stock.
Image source: Getty Images.
Gaming the system
GameStop, of course, is one of the premiere meme stocks on the market, often trading more on how much chatter is generated on social media and internet stock discussion boards than on the fundamentals of the business. In those circles, the self-described "apes" have encouraged each other to hold firm and not sell their shares because a short squeeze, or fast and notable run-up, in GameStop's share price was imminent.
The video game retailer remains a heavily shorted stock -- over one-fifth of its shares are sold short. So, when GameStop said it would be splitting its stock as a dividend, that was seen as the catalyst to set the MOASS in motion. But that's not how it works.
A special kind of dividend
Most people are familiar with a cash dividend, where a company pays you a portion of its profits each month, quarter, or some other interval. As I explained once before, GameStop deeming its stock split a dividend is more a type of boilerplate language than some incantation with special powers.
Another heavily shorted stock, Tesla, has also said it will split its stock as a dividend, as do many companies. Alphabet's 20-for-1 stock split on July 15 will be in the form of a special dividend.
By declaring the split a dividend, a company is really only changing its accounting, essentially how much it keeps in its retained earnings account, and not much else. GameStop's stock dividend won't affect its cash balances as it would if it issued a cash dividend (which could cost short-sellers a lot of money), and the split won't trigger a new "gamma squeeze" on its shares.
More important matters to address
While GameStop's stock typically doesn't trade on its fundamentals, that doesn't mean it never does. After announcing its stock split, the video game retailer also said it had fired its CFO and was laying off employees. After jumping 15% on the split announcement, the stock tumbled again in the aftermath of the firing and layoffs.
Meme stock traders like to claim the game is rigged against them and that the Securities and Exchange Commission is allowing illegal or improper activities. These traders are also basking in the camaraderie that develops in the chat rooms. Yet, they also tend to reinforce the notion that if they hold on just a little longer, they could wait out the monied interests better against their stock and realize significant riches when the MOASS occurs.
There may very well be a triggering event at some point, but GameStop's stock split isn't it.
