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GameStop has been hit hard as more people download games instead of using physical discs.
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The GameStop saga will take a new twist on Friday when shares begin trading following the company’s four-for-one stock split.
Anyone who was a GameStop shareholder at the close of business on Monday received three additional shares. Investors who bought GameStop stock between Tuesday and Thursday will receive their additional shares from the seller.
On Friday, GameStop stock will trade on a split-adjusted basis, meaning a share will be worth a quarter of what it was worth before the split. Shares of GameStop closed at $153.47 on Thursday, so the price would be $38.37 on a split-adjusted basis.
A stock split doesn’t change anything fundamental to the underlying company because it’s like cutting the same pie into smaller pieces.
However, some investors accumulate before stock splits because the stocks being split tend to outperform the market. This is likely a case of wagging the dog, as stocks with strong momentum are more likely to split than market laggards.
Shares of GameStop are up 3.7% in 2022, although they are down 14% from where they were trading 12 months ago. The S&P 500 is down about 16% so far this year, putting it about 8% below its level at this time in 2021.
Even on a split-adjusted basis, the stock would be well above where most analysts expected GameStop to trade in 2020 — and even in 2021. The stock was trading at less than $3 at the start of the pandemic, but has soared through August 2020, when Chewy co-founder Ryan Cohen revealed a stake. He joined the board in January 2021, setting off a buying spree among retail investors exchanging stock tips on Reddit. That surge in prices forced investors who had bet against the stock to exit their positions in an epic crash that choked some hedge funds.
Shares of GameStop closed at $347.51.
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Cohen became chairman in June 2021 after the company shook up its senior team with executives with e-commerce experience. Under CEO Matt Furlong, the company has invested heavily in turnaround.
GameStop has struggled for years as consumers have shifted away from physical discs to online games and digital downloads. It is now betting big on expanded offerings like computer supplies and TVs. It also launched a market for irreplaceable tokens that it hopes will better position GameStop for the next era of gaming, though analysts are skeptical it can turn the company’s fortunes around.
Management said this spring it wanted to split shares, and in June shareholders approved an increase in the authorized number of shares to a billion from 300 million. GameStop announced the details of the split this month.
The company is still popular in some corners of Reddit. Some users believe there could be another dramatic spike. On the other hand, the stock still has more than its fair share of short sellers selling borrowed stock to bet on a bigger decline.
About 13.5 million pre-split shares were recently sold short, or 21.6% of shares available for trading, according to data from short-selling analytics firm S3 Partners. The amount of short shares will change after the split, but the dollar amount, $2.15 billion, will remain unchanged, according to S3 Partners principal Matthew Unterman.
Write to Connor Smith at connor.smith@barrons.com
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