Investors will notice that GameStop (GME 0.10%) stock is now trading below $50 per share, courtesy of a four-for-one stock split the company just completed.
The gaming retailer is still a favorite target of short-sellers; more than 17% of outstanding shares are sold short.
Could this stock split be the catalyst for another short squeeze? Here is what you need to know.
What does GameStop's split mean?
In short, stock splits don't change anything about a stock's fundamentals, but there are still reasons why companies do them.
Imagine you and three friends cut a pizza into four large slices, each person getting one piece. Then, four other friends come over and want pizza but there's not enough for everyone. So, you and your three friends cut their slices in half to make eight smaller slices, enough to share with everyone.
Did the actual size of the pizza get larger? No, but each slice got smaller, so more people could have some. This is essentially how a stock split works. GameStop's four-for-one split means each share got "cut" into four smaller shares. So if you had 100 shares before, you'd have 400 after the split, but they will still add up to the same value as the original 100 stubs.
Companies use stock splits to make their stock more affordable for retail investors, making the stock more liquid in the process. A stock with a higher number of cheaper shares is easier to buy and sell on the market.
Always refer to the fundamentals
Most importantly, stock splits have nothing to do with a company's financials, so they shouldn't affect your decision to buy or sell a stock. It would be best to look at a company's financial data to see how the business is doing.
GameStop was a revelation last year; a historic short squeeze caused the stock to soar. But even though the stock's well off its highs, you can see below how its enterprise value, the sum of its market cap and debt minus its cash, is still far above its long-term norms, despite revenue declining 25%.
GME Enterprise Value data by YCharts
Meanwhile, free cash flow and net income are tremendously negative and trending in the wrong direction:
GME Free Cash Flow data by YCharts
In other words, the stock remains more expensive now than it used to be, despite the actual performance of the business getting notably worse over time.
Is GameStop a buy today?
GameStop is one of the poster children of the short squeeze craze, which makes the stock especially volatile. It's certainly possible that investors could see a short-term bump because of the stock split.
However, fundamentals tend to rule the roost over time, and GameStop's financials don't paint an attractive picture. If you're going to test the waters, use a diversified portfolio and know that GameStop is a very speculative stock to own.
For long-term investors, it's hard to see a solid case for owning GameStop shares until the business can establish and sustain some positive trends in its financials. There are better places to put your money in a bear market that's taking everything to the woodshed.
