Morning Brief: GameStop saves money by raising money

Myles Udland breaks down Wednesday’s Morning Brief, which details how the ‘meme trade’ has been one of the market’s most defining trades this year as it has reshaped the fundamentals of businesses and GameStop successfully raising $1.6 billion through its latest share offering.

Video transcript

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JULIE HYMAN: Well, the other sort of momentum, interesting retail money trade that we've been watching so closely is one that Myles highlighted in the Morning Brief. And that, of course, has to do with meme stocks and in particular this phenomenon that you've been, I think, articulating for a while, Myles. But your argument about this sort of gets clearer and clearer, that is the meme stock phenomenon, which sort of was without fundamentals for a long time now has sort of fundamentally sized itself in some ways, as we see more and more companies start to take advantage of the surges in their stocks to actually raise cash.

And of course, GameStop is the one that held out and then did it. And now we're seeing a lot of the littler meme stocks start to chip away at doing this as well. So it's really getting interesting, the more companies that are piling on in doing this.

MYLES UDLAND: Yeah. So let's just kind of go through the details of GameStop as I laid it out in the brief this morning. So the company, over the last three months, has issued 8 and 1/2 million shares. And in that process, they've raised about $1.7 billion, back out some fees. So let's call it $1.6 billion.

They've issued this 8 and 1/2 million shares, which is worth about 12% of the float, so decent dilution but nothing so crazy that current shareholders obviously look at the price. Current shareholders haven't gotten spooked out of their position.

So they've sold the stock at an average of $197 per share, pretty good deal for the company. A year ago, they were a $4 per share company worth about $300 million on a market cap basis. They had long-term debt equivalent to about $420 million. They had cash of about $580 million on their balance sheet.

They've wiped out the long-term debt. They now have more than a billion at their disposal. They have an entirely new management team. And GameStop is now really looking at, as analysts would say, they have some visibility. They have runway towards how they're going to transform their business.

Julie, as you've mentioned many times, not a lot of details on that point yet. But with this cash pile, they have a lot of leeway to execute on something here.

And you bring up an interesting point with respect to the meme trade and the fundamental basis of it. GameStop began as a fundamental story started by Keith Gill, roaringkitty, among others who were circling this idea. And I went back yesterday. And I watched Gill's video from July, 2020. He had a one-hour video. I linked to it in the brief this morning. Where he outlines the case of why GameStop was undervalued at $4 per share.

He cites Michael Burry's letters to management. Burry, of course, was involved on the long side of GameStop back at that time. Goes through are physical disks really dead? Is the demand for video games really waning as hard, actual games, actual consoles waning as hard as you might otherwise think? We have an upgrade console cycle coming up. That could be a driver for GameStop. He does all this work. And his case was, fundamentally, this stock is undervalued.

Now, the meme part of it has taken on a life of its own. Other stocks have gotten involved with that. But the meme part of the stock trade has enabled the company to improve its fundamental standing.

And I think AMC is another great example of this. AMC, the bet was basically, are they going to go out of business or are they not going to go out of business. The market deemed that they wouldn't. And then once the internet got a hold of it, they made it even more attractive, as we can see here on the chart, for AMC to go and raise capital at, I think, in the high 20s per share.

But the action really started in the beginning of this year, when it was a binary, in business, out of business kind of play, which is sort of where GameStop was a year ago. It was a binary, in business, out of business kind of play. The meme trade has made it cheaper and more attractive to raise capital. But it has really exacerbated the fundamental debate that was happening underneath the surface here.

And it is a reminder that the meme trade is fun. And there are names-- Torchlight, right? Comes and goes-- but the actual guys that stick around, your GameStops, your AMCs, there's a real story here, Sozzi, based on the real business. And the real business is now in significantly better shape because of the way that retail and Reddit and others have gotten involved in the stock.

BRIAN SOZZI: Myles, let me toss this one onto your plate. Now, considering with this cash raise and the cash they had on their balance sheet, about 10% of GameStop's market cap is now in fact in cash. It's a high class problem to have. But that is a large number compared to other retailers and compared to, frankly, a lot of other companies in the S&P 500. Couldn't that also be a curse, do you think? Or if this management team doesn't come out in a couple of months and lay out a clearly articulated plan, the stock could get penalized because they have no plan, and they're just sitting on low-yielding, no-yielding cash?

MYLES UDLAND: Yeah. I mean, look, I think the amount of cash they have on the balance sheet, it makes it imperative that they spend it. If we go back in time last year, the cash balance-- if you take the debt they had, about 400 million. They had cash of about-- it was about 550 million. So net that out. They had 150 million cash with a market cap of $300 million. They were already in this kind of over-cashed position.

And I think that the debate, if you go back in time then, is going to be, well, why isn't GameStop paying me a dividend or buying back a ton of stock? They did buy back a lot of stock. But why isn't GameStop giving me that if they're not going to invest in the business?

And I think, to your point, Sozzi, the amount of capital that's now available to GameStop makes it imperative that they actually outline some of these plans. But you say a few months. I don't know. We couldn't get a single analyst to talk about this name. So I'm not sure what the institutional community right now is even thinking about this name, if they're even covering this name.

So who knows what happens with the stock price because really, it's unclear who is supporting it because we know there's not a lot of traditional coverage? And I don't think a lot of institutional investors are taking an interest in the story the way they might have when it's a battleground name, called it $4, $10, even $15 per share.

JULIE HYMAN: You know, guys, as we're talking, what this makes me then think about is, what do these companies owe these shareholders who have effectively bailed them out, right? If you look at other sort of similar situations, whether it's government bailouts, whether it's private equity coming in and scooping up a company that is at or near bankruptcy-- I mean, AMC, remember, was running out of cash and said it might not be able to continue as a going concern.

Private equity comes in. They can reorganize the company and do with it what they want and try to strip the profit out. Government, you have some accountability when you get bailed out by the US government, for example.

These shareholders have effectively bailed out these companies. And at some point-- obviously, they've been very forgiving for now. They keep buying the shares, presumably. But at some point, will the company feel a responsibility to return the favor in some way, deliver some profits in some way, pay a special dividend-- who knows-- in some way, or will they continue without that cognizance?

Now, in the case of AMC, it does seem like they have that awareness, right? Free popcorn for shareholders, et cetera. But I am curious how the likes of GameStop and others are going to turn out because for now, the GameStop CEO and management and Ryan Cohen can say, we're not going to tell you our plans yet. And those retail traders seem to be fine with that.

But at some point, I wonder if that sort of seeming rebelliousness or pushback against Wall Street is also going to backfire and be a pushback against the very people who have effectively saved the company.

BRIAN SOZZI: No, that's really on the mark, Julie. At least with AMC, you get an idea they're raising all this cash because they want to buy shuttered movie theaters. You have a clear idea of what they're going to do with all this capital. And you can make the case that it does make sense. You've had a lot of movie theaters closed. AMC is looking to consolidate its position.

But I think new CEO at GameStop Matt Furlong, he owes investors-- in three months-- I know it usually takes six months for a new executive to articulate a plan, maybe put in some more of his own or her own executives. He owes, I would say, these traders and these investors in his stock a plan within three months, a clear growth plan, not just a plan to save the company, just a clear plan to driving sales and earnings growth. And if they don't, I think that entire GameStop management team and board will find out very quickly how these meme stocks can quickly turn against the company.

MYLES UDLAND: Yeah. I mean, I think a challenge, though, for the GameStop group is that the true believers in the story-- again, Keith Gill was before congress when the stock was at $40 per share, which was a 10X from where he got involved, saying that he still liked the stock. And at the time, that seemed crazy. And now the stock has gone up, what, 7-8X from there? And actually, at its peak it went up another 10x from that $40 per share.

So what I'm trying to say is that GameStop-- and I think AMC is in this bucket as well. The stock can get cut in half easily. And the company management still has to deliver on pretty lofty expectations.

Sozzi, I don't know this timeline. We can agree or disagree on how tight that needs to be for having an investor day, outlining your plan, and so on and so forth. But there is certainly a lot that these teams need to do to justify the stock price.

And I guess to answer kind of what you're throwing out there, Julie, I'm not sure how much they owe investors who bought basically 10, 15 years worth of growth, right? Like, you can say I owe you that in 15 years. You bought the company when it went up 30 times from where it traded before the pandemic or in the midst of a pandemic. So I'm not exactly sure.

I guess I'll be interested as well at what point does, again, the traditional Wall Street investor-analyst community get interested again in the story? Because right now, both are kind of radioactive. No one really wants to touch them.