GameStop Corp (NYSE:GME) shares have pulled back after the video game retailer announced a planned $1.3 million debt issue of convertible notes due in 2030 to purchase Bitcoin in addition to funding general corporate activities.
Shares of GameStop fell 12% to about $25, erasing gains from Wednesday’s session.
Analysts at Wedbush expect GameStop’s debt offering to fall flat.
“At its current share price, the offering would require the issuance of 46 million additional shares,” they wrote.
“We suspect that GameStop’s share price will drift lower prior to the issuance of the convert, particularly given that a convert investor will receive a zero coupon and will be required to have faith that the GameStop meme phenomenon will persist for another five years.”
However, the analysts noted that they have been skeptical of GameStop’s past offerings, which have consistently surprised them by finding new investors.
“The issuance of the convert at the current share price would raise the company’s cash per share to around $12, just over our price target of $11.50.
“We maintain our ‘Underperform’ rating on GameStop shares and will revisit our target, estimates and rating once the company completes the convert offering.”
Paying a premium
Investors purchasing the bonds will be paying a large premium to GameStop’s assets, the analysts added.
“The company currently has around $4.8 billion in cash and the convert will bring its cash to $6.1 billion,” they wrote. “The stock is currently valued at $12.7 billion, or more than twice its cash balance after the convert is issued.”
The company is following the “MicroStrategy playbook” but noted that MicroStrategy currently is trading at more than 2x the value of its Bitcoin holdings, Wedbush added.
“We find it hard to understand why any investor would more than 2x cash value for the potential for GameStop to convert that cash into Bitcoin, particularly since the same investors can invest in Bitcoin or a Bitcoin ETF themselves,” they wrote.
Wedbush added that GameStop’s entry into the trading card business seems to be its only recent venture to see modest success as its NFT marketplace has struggled to gain traction.
“That said, despite a complete lack of articulated strategy, GameStop has consistently been able to capitalize on the existence of ‘greater fool’ willing to pay more than twice its asset value for its shares—and so far, they’ve been right,” they wrote.