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Wednesday, June 23, 2021

GameStop saves money by raising money

The "meme trade" has been one of the market's defining trades this year. 

And while some investors have chosen to ignore the action we've seen in shares of GameStop (GME) or AMC (AMC) amid a value rotation, rising bond yields, and a booming economy, these retail-driven trading frenzies are starting to reshape the fundamentals of these businesses. They're more than just a sideshow.

Earlier this month, we argued AMC's capital raises into a frenzied stock market created a blueprint for how management teams need to approach the meme market. Stock sale announcements by second-tier meme plays like Express (EXPR) and MicroVision (MVIS) shows how executives are starting to follow this playbook. 

But after some hesitation, the grandaddy of all meme names — GameStop — has also taken this environment as an opportunity to reshape its balance sheet and help drive growth for the future. 

These moves show how consequential the meme trade can be. 

GameStop said on Tuesday it completed its recently announced 5 million share "at-the-money" stock offering. The offering brought in some $1.126 billion to the company and adds to the $551 million the company raised with its 3.5 million share offering completed back in the spring. 

And so in the last three months, the company has sold 8.5 million shares at an average price of around $197, and raised a whopping $1.677 billion. 

It was just under a year ago that Keith Gill published his first YouTube video outlining the thesis that GameStop shares were undervalued, heavily shorted, and likely to rise significantly in price. At the time, GameStop was trading around $4 per share, with the company valued at about $260 million.

On Tuesday, shares closed the trading session above $220, giving the company a market capitalization just north of $15 billion.

Story continues

In July 2020, with shares at $4 a piece, GameStop would've had to issue upwards of 400 million shares to raise the amount of money it has in the last few months. Instead, the unexpected and long-lasting rally in its shares allowed the company to sell just 3% of what would've been required to raise a similar amount just one year ago. 

And let's be clear — there is no chance GameStop could've issued that amount of stock last year. With more than $400 million in long-term debt on its balance sheet and a market capitalization under $300 million, raising $1.7 billion in equity would've been a near impossibility. 

In short, GameStop raised a ton of money without significantly penalizing existing shareholders — 8.5 million shares totals about 12% of the company's shares outstanding as of May 1. In addition, it raised an amount of working capital the company would never have been able to access without the rally while sustaining the high price of the company's stock. 

With the capital GameStop has raised this year, the company paid down all of its long-term debt, and gave its new management team — led by a slew of Amazon (AMZN) veterans — the firepower they need to try and transform a business Gill (and many others) believed was underappreciated by the market. 

GameStop CEO Matt Furlong's first day on the job was Monday. So far, GameStop has said only that it hopes to use this capital "for general corporate purposes as well as for investing in growth initiatives and maintaining a strong balance sheet." This is boilerplate language. 

And in many ways, raising this money was the easy part. How Furlong and the new executive team at GameStop deploy this capital will be a defining event in their careers. But to even be in this position would've been unthinkable for GameStop investors and managers at this time last year. 

Just something to keep in mind the next time someone tells you that what happens online isn't real life. 

 By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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  • 7:00 a.m. ET: MBA Mortgage Applications, week ended June 18 (4.2% during prior week)

  • 8:30 a.m. ET: Current Account Balance, Q1 (-$206.2 billion expected, -$188.5 billion during prior quarter)

  • 9:45 a.m. ET: Markit U.S. Manufacturing PMI, June preliminary (61.5 expected, 62.1 in May)

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  • No notable reports scheduled for release

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