GameStop shares took a nosedive on Thursday, marking its biggest loss since June, following the company’s announcement of plans to raise debt in order to purchase bitcoin. The stock plummeted by over 25%, erasing the gains made in the previous session.
The decision to raise $1.3 billion through the sale of convertible senior notes due in 2030 to invest in bitcoin was met with skepticism from investors. The board of GameStop had recently approved a proposal to use corporate funds or future debt and equity proceeds to buy cryptocurrencies, a strategy reminiscent of MicroStrategy.
Analysts raised concerns about the move, with Wedbush analyst Michael Pachter noting that the issuance of 46 million additional shares of GameStop would increase the company’s cash reserves to $6.1 billion. Pachter expressed doubt about the success of GameStop’s bitcoin investment strategy, citing the stock’s already inflated valuation.
With GameStop currently valued at $12.7 billion, more than double its cash balance post-convertible issuance, Pachter questioned the potential for further gains. In contrast, MicroStrategy trades at a lower multiple of its bitcoin holdings, making its strategy more appealing to investors.
The analyst warned that GameStop’s share price could decline further before the issuance of the convertible debt, as investors may be hesitant to bet on the sustainability of the meme stock phenomenon over the next five years. Pachter maintained an underperform rating on GameStop, citing the stock’s high valuation as a key concern.
In conclusion, GameStop’s foray into bitcoin following MicroStrategy’s lead faces challenges due to the stock’s lofty valuation. Investors are advised to proceed with caution and carefully evaluate the risks associated with the company’s investment strategy.
