GameStop shares drop on planned debt issue to buy bitcoin

GameStop shares experienced a significant drop on Thursday, giving back a large portion of the gains made the previous day. This decline came after the video game retailer announced its intention to raise $1.3 billion through the sale of convertible senior notes due in 2030 in order to purchase bitcoin. The meme stock tumbled more than 9% following a nearly 12% rally, as investors reacted to the news.

The GameStop board recently approved a plan to invest in cryptocurrencies using corporate funds or potential debt and equity proceeds. This decision mirrors a strategy famously employed by MicroStrategy. The sale of convertible debt will result in the issuance of 46 million additional shares of GameStop, increasing the company’s cash reserves to $6.1 billion from approximately $4.8 billion, according to Wedbush analyst Michael Pachter.

Pachter expressed skepticism about GameStop’s move into bitcoin, citing the stock’s already inflated valuation. With GameStop currently valued at $12.7 billion, more than double its cash reserves after the convertible notes are issued, Pachter doubts that the conversion of cash into bitcoin will drive even higher premiums. In comparison, MicroStrategy trades at less than two times the value of its bitcoin holdings, making its strategy more viable.

The analyst predicts that GameStop’s share price may decline further prior to the issuance of the convertible notes, as investors assess the risks associated with the move. Pachter emphasized that convert investors will receive zero coupon payments and will need to have faith in the continued popularity of the GameStop meme phenomenon over the next five years.

In conclusion, GameStop’s decision to follow in MicroStrategy’s footsteps by investing in bitcoin has raised concerns among analysts about the stock’s valuation and the potential impact on its share price. The market will be closely watching how this strategy unfolds in the coming months.