What does the GameStop (GME Stock) stock allocation mean for the short squeeze?

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2022 looks like a year of stock splits as companies seek to make their stocks more attractive to retail investors. Following recent split announcements from Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA), GameStop (NYSE:GME) has followed suit, hinting at plans for its first stock split in 15 years.

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The U.S. video game retailer, which has become a favorite “meme stock” of retail investors, revealed in an SEC filing during secondary market hours on Thursday that it plans to implement a split of its Class A shares in the form of a stock dividend.

GameStop said it plans to increase its number of shares to 1 billion from 300 million, indicating it will conduct a three-for-1 stock split, giving existing shareholders two additional shares for each share they hold in society. The plan is still subject to shareholder approval at the company’s annual meeting.

The company’s stock, which hit its 2022 high of $189.59 on March 28, jumped 15% in premarket trading on Friday following the news before paring gains to close down 0.8 % on the New York Stock Exchange.

Compared to Apple and Amazon, whose stock prices have hovered around $3,000 in recent months, and Tesla’s stock price which closed over $1,000 on Friday, GameStop’s stock is relatively more affordable for mom-and-pop investors and those riding on a new investing trend that has become popular during the COVID-19 pandemic.

GameStop to the moon

GameStop is among the most favorite meme actions on Reddit forums, such as the hugely popular WallStreetBets subreddit where users discuss the next stock to inflate. Investors piled into GameStop stock in January 2021, sending its shares skyrocketing 400% week-over-week on January 29, 2021, to an all-time high of $325.

This caused a short squeeze in GameStop shares, dealing a blow to short sellers who collectively lost around $13 billion, according to estimates by financial analyst firm S3 Partners. Market watchers also attributed the surge in GameStop shares to hedge funds that made substantial profits from the short squeeze.

GameStop’s stock has since fallen 49% since that peak on Friday, April 1, as many investors are unable to justify the company’s stock price given its poor financial results.

GameStop’s finances aren’t keeping up

In the recent fiscal year ended Jan. 29, GameStop reported a net loss of $381 million, 77% more than its loss of $215 million in 2020. Revenue, however, soared to $6.01 billion. , compared to $5.09 billion the previous year. Prior to the short January 2021 squeeze, there had been rumors that GameStop might close as the company announced store closures and incurred millions of dollars in debt.

“This short sellers’ greed to bankrupt GameStop – ironically they’ve now saved GameStop forever, probably forever,” said Justin Dopierala, founder of DOMO Capital, as quoted by Digital Trends.

With the money raised in the stock market, GameStop could turn around its business. The company recently disclosed plans to launch into non-fungible or NFT tokens by the end of the second quarter of fiscal 2022.

Risky bet for short sellers

For short sellers, GameStop’s planned stock split would require them to purchase additional shares before returning their loaned shares.

As the company plans to complete its stock split by issuing a stock dividend, shareholders who lend their shares to short sellers are still entitled to the GameStop dividend, while the short seller will either have to repurchase the stock. before the ex-dividend date, or pay a dividend to the other party who acquired the stock short.

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