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Why Gamestop's $2.1 Billion Stock Sale Hurts Its Shareholders and the Economy

June 25, 2024
minute read

GameStop's volatility has significantly increased with the return of Roaring Kitty, a prominent figure in the trading of meme stocks, once again drawing attention to GameStop. His involvement in these markets is instrumental in bringing the company back into the limelight.

Less widely known is GameStop’s recent announcement that it raised $2.1 billion by issuing new shares directly to the market. This move, while beneficial to GameStop, has hidden costs for both its traders and the broader U.S. economy, often going unnoticed. Here’s how these developments are interconnected.

Three years ago, GameStop’s stock experienced a dramatic rise when commentators on Reddit’s WallStreetBets speculated that the substantial short-selling interest—about 100% of all shares outstanding at the time—would trigger a buying frenzy to cover losses if prices surged. This speculation proved accurate. As short sellers scrambled to buy shares, GameStop’s stock price soared from a mere $1.25 to an intraday peak of $120 (adjusted for a later 4-for-1 stock split).

Those who wisely closed their positions during this surge made significant profits. Conversely, short sellers incurred losses, as did numerous buyers who mistakenly believed the upward trend would continue indefinitely. In my view, these naive buyers lost more than the short sellers.

The $2.1 billion that GameStop raised did not appear out of nowhere; it came from the market when GameStop sold its shares to eager buyers. These buyers, or whoever they eventually sell to, will likely incur losses when GameStop’s stock eventually falls to its intrinsic value.

In every trade, there is a buyer and a seller. If prices decline, the buyer loses while the seller avoids that loss. If prices rise, the buyer profits while the seller misses out on potential gains. Trading is fundamentally a zero-sum game, where one party’s gains are matched by the other’s losses. However, when a company itself is a seller, the overall market loses if the company gains. Therefore, the capital GameStop raised acts as a tax on all other traders.

Eventually, traders will recognize this reality. The losers will exit the market, and the winners will have fewer opportunities to profit. As a result, GameStop’s stock price will likely return to more realistic levels.

The broader economy also suffers from these speculative episodes. The funds GameStop raised through new share issuance are now under its control. If used to sustain its ongoing money-losing operations, this capital will be wasted. GameStop operates in a declining industry; consumers are no longer purchasing video game software and hardware from brick-and-mortar stores as they once did. This trend is not expected to reverse, as former customers now prefer to buy these products online from established vendors. Investing further in physical retail locations is, therefore, imprudent.

The capital GameStop raised could potentially have been more beneficial if allocated to other areas, such as research into better drugs, materials, or energy sources. While GameStop’s board has recently given management the authority to make such investments, there is little reason to believe that executives from a video game retailer will make better investment decisions than trained professionals in various scientific fields.

Through this unusual allocation of capital, naive traders are indirectly bolstering GameStop’s balance sheet. We can only hope that GameStop’s management will use this newfound wealth wisely.

John Liu
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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