GameStop (GME) shares experienced a significant drop, plummeting over 23% on Thursday, following the company's announcement of a $1.75 billion debt offering. This news comes shortly after GameStop revealed a $500 million investment in Bitcoin, raising concerns among investors about the company's financial strategy.
The debt offering involves selling convertible senior notes, a method of raising capital where investors essentially lend money to GameStop. These notes can be converted into GameStop equity before their maturity in 2032. While this provides GameStop with funds, it also dilutes existing shares, potentially decreasing the value for current shareholders.
Why is GameStop raising so much debt?
GameStop stated that the proceeds from this debt sale will be used for investments and potential acquisitions. This follows a similar move in March, where the company sold $1.3 billion in convertible bonds. The funds from that offering were partially used to purchase Bitcoin, reflecting GameStop's shift towards incorporating cryptocurrency into its financial strategy.
The Meme Stock Factor
GameStop gained notoriety as a meme stock during the unprecedented rally of 2021, fueled by retail traders in the Reddit group r/wallstreetbets. More recently, the company updated its investment policy to include Bitcoin as a “treasury reserve asset,” holding the cryptocurrency as part of its corporate treasury. This strategy mirrors that of companies like Michael Saylor's MicroStrategy, which have used debt and equity to accumulate Bitcoin in hopes of boosting their stock price.
However, investors remain cautious, citing the inherent volatility of Bitcoin. According to David Yermack, a professor at NYU Stern School of Business, leveraging a Bitcoin treasury strategy carries the risk of bankruptcy if Bitcoin prices decline rapidly. This concern was evident when GameStop's initial Bitcoin investment announcement in May resulted in a 10% drop in share value.
Furthermore, GameStop's revenue has been declining since 2023 as video game consumers increasingly opt for digital purchases over visiting physical stores. This shift in consumer behavior, combined with the company's aggressive Bitcoin investment strategy, appears to be contributing to investor unease and the recent stock decline.