GameStop tumbles 34% as Reddit darling mulls share sale
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FILE PHOTO: GameStop and Reddit logos are seen displayed in this illustration taken February 2, 2021. REUTERS/Dado Ruvic/Illustration/
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By Munsif Vengattil and Akanksha Rana
(Reuters) - Shares of Reddit-favorite GameStop Corp slumped 34% on Wednesday, a day after the videogame retailer said it might cash in on a meteoric rise in its share price to fund its e-commerce expansion.
GameStop shares remain up over 500% this year, benefiting from a push by retail investors on Reddit forums to drive up prices of heavily shorted stocks.
The company said on Tuesday after reporting quarterly results that it has been considering since January whether to increase the size of the $100 million share sale that it originally announced in December.
GameStop had previously decided against the move as it was restricted under U.S. financial regulations from selling shares because it had not yet updated investors on its earnings.
The stock sale program was assigned to Jefferies, whose research arm on Wednesday raised its price target by a whopping $160 to $175, but kept its rating at "hold".
That is much higher than the median price target of $25, according to Refinitiv data, and marks the first time a Wall Street brokerage matched its price projections with GameStop's current trading levels.
Reddit's WallStreetBets forum buzzed about another potential short squeeze. Such a short squeeze sent GameStop's shares as high as 2,300% in January to a record high of $483.
A short squeeze occurs when investors who have bet against a stock need to buy it at much higher levels to cover losing positions.
Short interest in GameStop has since fallen to about 15% of the stock's float as of Wednesday from a peak of 141% in the first week of 2021, according to data from financial analytics firm S3 Partners.
The shares closed at $120.34 on Wednesday before falling an additional 4% in extended trade. The company on Tuesday reported a ninth straight decline in quarterly sales and said it would close more retail stores and exit unprofitable businesses, underscoring Wall Street's concerns about its business.
GameStop also skipped a question-and-answer session after the results.
Wedbush analysts downgraded the stock to "underperform" from "neutral", saying the short squeeze had boosted the share price to levels that were completely disconnected from the fundamentals of business.
Billionaire investor and Chewy.com co-founder Ryan Cohen, who is on GameStop's board, plans to transform the retailer into an e-commerce firm that can take on big-box players Target Corp and Walmart Inc and technology firms such as Microsoft Corp and Sony Corp.
"We continue to be very skeptical on GME's efforts to address ... the fact that its core market in new and pre-owned physical console gaming is shrinking at a rapid pace," Curtis Nagle, an analyst at Bank of America's research arm, said in a client note.
Nagle has a $10 price target and an "underperform" rating on GameStop's stock.
Of the seven analysts covering GameStop, none has a "buy" or a higher rating on the stock.
(Reporting by Munsif Vengattil, Sagarika Jaisinghani and Akanksha Rana in Bengaluru, additional reporting by Noel Randewich and Megan Davies; Editing by Arun Koyyur, Saumyadeb Chakrabarty and David Gregorio)
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