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What do you do when your stock becomes an inflated joke? Heck, what can you do? This is the question several companies have pondered over the past few weeks, as a social-media-driven trading frenzy propelled struggling stocks to implausible highs.
The epitome of the trading fever was GameStop, the past-its-prime video game chain whose stock, which was trading as low as $10 in September 2o20, hit $347 on January 27, 2021, courtesy in part, of a tweet by influencer and richest human on Earth Elon Musk; as of February 8, the stock’s price had plummeted to $66 – less impressive, but still well above its December valuation.
While we all had a good laugh with the idea of Reddit pumping duds to unjustifiable prices, it’s likely that some companies caught in the joke-trading were dead serious. As Bloomberg’s Matt Levine has pointed out, from a purely theoretical point of view stock markets are “a way for people to invest money in companies”. Even if its market cap of £200 billion at the peak of the frenzy might look meaningless, GameStop could have tried to capitalise on the mania – raising funds to reinvest in the company. The meme stocks frenzy might seem like fun – but it has many strange real-world consequences.
For the likes of GameSpot, the most straightforward way to ride the wave would be to sell new stock. Indeed that is what movie theatre chain AMC – one of the other companies involved in the past weeks’ craziness – did early on in the rally, raising $304.8 million from the sale. AMC’s move, while fairly successful, also showed the importance of timing when pulling such a move: had AMC waited another day before selling its stock, it would have raked in $1.26 billion instead.
That is not the only pitfall for joke-traded companies hoping to cash in. According to Chester S. Spatt, a professor of finance at Carnegie Mellon University and former chief economist at the US Securities and Exchange Commission, a company issuing stocks would necessarily dilute the existing stock supply. In the current scenario, where much of the increase in price can be chalked up to short-sellers scrambling to borrow ever-scarcer stocks, a new issuance might end up bringing down the price.
“The issuance of new securities creates potentially more supply out there in the marketplace,” Spatt says. “That can potentially break the ‘short squeeze’. If you put out a huge number of shares, you’re not going to get the same price as if you put out a very small number of shares.”More importantly, though, the issuance of new stocks in the midst of an admittedly ludicrous rally is a legal quagmire. There is, in fact, a precedent for this situation: in June 2020, car rental company Hertz was caught up in a similar, online-powered rally – its stock soaring by over 1,000 per cent even if the company had literally just filed for bankruptcy. For a while, it looked like Hertz could surf the wave to stonk glory, as it prepared to issue $500 million in stocks. Then the SEC chairman appeared on TV decrying the move – and soon the issuance was cancelled. That is why Spatt says that companies looking to use the current frenzy to raise money must consult with their securities attorneys to “make sure they get the disclosure right”.
Threading the needle in order to avoid the unwanted attention of financial regulators while still raising enough capital is a high wire act, especially as the situation still looks extremely volatile. “If you issue the equity almost effectively knowing it will collapse, then your fiduciary duty – your chief financial officer – could get into trouble,” says Ranjan Roy, a finance professional and author of the finance newsletter Margins. “It almost becomes a game in the sense that you don’t want to issue your stocks too high. If GameStop issues at a price of maybe around $150 to $180, no one would ask questions – at $400 it becomes a little tougher to justify.” GameStop did not respond to a request for comment regarding its response to the stock market frenzy.
The question worth asking, of course, is what GameStop could have done with the money raised that way. Like its fellow joke-traded companies AMC and American Airlines, GameStop is the kind of company doomed to fare badly in this day and age: a brick-and-mortar video game store caught in a pincer move between gaming’s transition to digital and online and a pandemic forcing shops to stay shut. An injection of cash won’t be enough to change reality, says Venkatesh Shankar, director of research at the Centre for Retailing Studies at Texas A&M University.
Shankar says that the company spent 2020 trying to weather a wave of closures – over 400 out of 5,000 shops permanently shut doors – and is still lacking “a very strong strategy for the future.” Prompted by tech stockholder and newly-appointed board member Ryan Cohen, the company had recently initiated a review of its business model. “But while they were doing it, all this ‘reddit versus Wall Street’ battle took over and started distracting the attention of management,” Shankar says. He thinks that although GameStop might have used a stock sale to raise money and possibly pay off some of its debts, that is no substitute for devising a new business strategy.
The best way for GameStop to bank on the recent whirlwind of speculation might be winning over the retail traders flipping its stocks as prospective customers. “Millennials, Gen Z-ers, who may not have thought of GameStop as a fashionable brand – this drew some attention from them. So how can we attract their attention for the future?,” says Shankar. “This is how GameStop management should be looking at it.”
That doesn’t mean that the age of the joke-stocks is over. Far from it. Just look at Tesla – the company owned by financial-meme-machine Elon Musk. Even if Musk’s electric vehicle company is by no means in financial dire straits, the continuous, wild rally of its stock is hard to grasp without taking into account the element of sheer fun that goes hand-in-hand with trading and owning it. Musk is a space-farer; Musk invented hyperloop; Musk changed his Twitter bio to #Bitcoin, and single-handedly made joke cryptocurrency Dogecoin skyrocket in value via tweet.
People will, it seems, buy a piece of the Musk hype just to partake in his endless joyride. “Tesla has been doing this the whole way up: they’re just happily issuing more shares diluting every existing shareholder. And so far everyone has happily gone along with it,” Roy says. On February 8, Tesla revealed that it had invested $1.5bn in bitcoin. Within minutes, the cryptocurrency’s price hit an all-time-high of $43,000. GameStop started the joke – but maybe Musk is having the last laugh.
Gian Volpicelli is a senior editor at WIRED. He tweets from @Gmvolpi
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