Key Takeaways
- GME shares declined by 25% to their lowest price since October after the hype surrounding GameStop’s Bitcoin treasury adoption died down as shareholders remained divided on its funding mechanism.
- The American gaming retail giant announced earlier this week that it plans to issue $1.3 billion in convertible debt bonds, maturing in 2030, to raise funds for Bitcoin purchases.
- Analysts suggest that the decline may be due to existing shareholders either selling off or shorting GME as they are concerned about whether the plan will be successful due to the shares already trading at 2x GameStop’s cash holdings.
- Financial experts argue that it is unlikely for investors to spend double the amount to convert GME stock into Bitcoin, instead, they could directly invest in BTC or spot BTC ETF at market price. Nevertheless, they suggested that with its $4.5 billion cash reserves, GameStop is in a better position than Strategy to capitalize on Bitcoin.
GameStop (GME) shares tumbled 25% on Thursday, erasing all the gains the American video game retail giant made this week after announcing that it would add Bitcoin (BTC) to its corporate treasury and was planning to issue $1.3 billion in 0% convertible bonds to fund the move.
Convertible bonds are corporate debt notes that can be converted by the holder into the common stock of the issuing company.
GME Stock Drops 25% After Investors Raise Concerns About Bitcoin Funding Strategy
GME fell to $21 during the intraday session on Thursday after rallying 12% in the previous day’s session. The stock is trading at its lowest price since October and down over 28% from Wednesday’s peak of nearly $30 as investor hype died down after a closer look revealed issues with its financing mechanism for acquiring Bitcoin.
On Tuesday, the GameStop board of directors approved a plan to utilize its cash or future debt and equity proceeds to invest in Bitcoin and dollar-denominated stablecoins.
The memestock darling is also offering institutional investors the opportunity to purchase an additional $200 million in notes within 13 days of the initial sale, with the bonds maturing in 2030.
GameStop is following in the footsteps of business intelligence firm Strategy (MSTR), formerly called MicroStrategy, to become the latest company to use the proceeds of convertible bonds sales to purchase Bitcoin. Since 2020, Strategy has used the sale of its debt notes to purchase a total of 506,137 BTC, worth over $44 billion.
The then-struggling software firm turned around its fortunes after heavy-loading on the apex cryptocurrency, significantly boosting the price of MSTR shares and becoming the largest corporate shareholder of Bitcoin.
Nathan Cox, the chief investment officer of Two Prime Digital Assets, wrote in an email to crypto news publication The Block that GameStop is “clearly” inspired by the model established by Strategy and the company’s relative success doing so.
However, the company founded by Michael Saylor has a market capitalization of $80 billion, far exceeding its Bitcoin net asset value. This prompted some investors to express concerns about its premium valuation and the company’s growing number of Bitcoin-led business and investment initiatives.
Analysts Expect GameStop Shares To Stoop Lower Before $1.43B Convertible Bonds Are Issued
Lois Liu, CIO of Mimesis Capital, said in an X post that many existing GameStop shareholders dislike the move. The sharp sell-off may also have to do with the convertible bond pricing period, as prospective bond buyers might be selling or shorting the stock. CoinDesk senior analyst James Van Straten noted that the stocks of Strategy (MSTR) and Bitcoin mining firm Semler Scientific (SMLR) also experienced similar declines during the pricing periods of their convertible note offerings.
Wedbush analyst Michael Pachter suggested that GameStop’s share price will “drift lower” before the convertible bonds are issued, particularly given that a convert investor will receive a zero coupon and have to trust that the “meme phenomenon will persist for another five years”.
He is doubtful that GameStop following Strategy’s playbook will be successful because MSTR trades less than twice the value of its Bitcoin holdings, while GME trades at more than twice its cash holdings. Under the convertible debt sales round, the company will be required to issue 46 million additional GME shares, bringing its cash holdings to $6.1 billion, up from its current $4.8 billion.
GameStop is currently valued at $12.7 billion, which is more than double the cash balance once the $1.3 billion convertible is issued. Patcher argues that with the shares already trading at more than 2x its cash holdings, it will be unlikely that any investor would pay double to convert that cash into Bitcoin when they could invest directly in BTC or a BTC ETF by themselves.
GameStop In A Better Position Than Michael Saylor’s Strategy To Capitalize On Bitcoin
Two Prime CEO Alexander Blume noted that the company is moving from the retail gaming space into financial engineering. He highlighted that GameStop’s revenue has been declining by 10-20% per year for the past five years, and it was “now or never” for the firm to find some other line of business. Blume compared it to MicroStrategy’s pivot to Bitcoin in 2020 after its revenues dwindled.
He also noted that GameStop has significantly more financial strength than Strategy if it decides to pursue aggressive debt financing for its Bitcoin purchase, and the company may conduct at-the-market (ATM) stock sales to capitalize on market volatility to bolster its corporate treasury. GameStop’s 12-month trailing revenue of $4.25 billion is roughly 10 times larger than Strategy’s $450 million.
Rumors about GameStop’s foray into digital asset investment took steam last month after the company’s CEO Ryan Cohen shared a photo on X with Strategy founder and chairman Michael Saylor at U.S. President Donald Trump’s Mar-a-Lago resort in Palm Beach, Florida, for the Super Bowl. A few days later, CBNC reported that the video game retailer was considering investing in alternative assets like Bitcoin and other cryptocurrencies to diversify its treasury holdings.
“Welcome to Team Bitcoin,” wrote Saylor in an X post following GameStop’s official announcement of plans to adopt Bitcoin for its corporate treasury. The company will be using its operating business as the foundation for capital raising, with the proceeds used to invest in the “digital gold”.
At the time of writing, Bitcoin (BTC) is trading at $86,175 – down 1.32% in the last 24 hours.
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