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Redditors, Ryan Cohen needs your help getting GME stock back to $ 500
In 2015, the Financial Times joked that RadioShack, a troubled brick-and-mortar electronics chain, should consider selling fruit baskets or converting their stores into Zumba studios in order to survive. The retailer had ignored the e-commerce threat for so long that few believed it could survive. Two years later, RadioShack was practically no more. Source: TY Lim / Shutterstock.com Today GameStop stock (NYSE: GME) is at a similar point. Since the early 2010s, GME’s top brass had treated the retailer like drunk at an open bar – paying a princely dividend to shareholders (and stock options for themselves) while cutting reinvestment in aging businesses. But then something happened: a group of retail investors, fueled by Reddit’s hedge fund haters / WallStreetBets, decided to move GME stock from $ 10 to $ 480 in a matter of weeks. People still love GameStop! InvestorPlace – Stock News, Stock Advice, and Trading Tips That love for GameStop and the disdain for Wall Street is an unusual combination. This means that unlike RadioShack in 2015, the video game retailer still has a chance to fight. For the good of GameStop and its shareholders, Reddit investors must end the revolution they started. And if it does, Redditors and Chewy (NYSE: CHWY) founder Ryan Cohen can still send GME shares back to $ 500. GME Stock: Purposely Driven into a Ditch Anyone who’s been to a GameStop store recently will tell you the same thing: you look old. And that is by design. For over a decade, GameStop’s management has enriched shareholders at the company’s expense. GameStop’s investment, the budget for maintaining its stores, peaked at nearly $ 200 million in 2011 before being slashed in favor of larger dividends and share buybacks. Meanwhile, the company’s operations have grown older and the layoffs have continued unabated. However, the shareholders allowed the then CEO J. Paul Raines to stay on course. Why? It made them money. Customers, employees and other stakeholders were not a priority. And after several failed acquisitions, including game developer Kongregate, GameStop’s management decided that milking the company for cash was a better choice. The company’s blind commitment to mediocrity peaked at the April 2020 strategy meeting. There the GameStop management outlined a plan to “optimize the core” and to create a “social / cultural center for games” by building “experience laboratories”. In other words, they wanted to get more traffic in their business. During a pandemic year. (How on earth did management make $ 35 million between them?) Change Afoot? Redditors think so. All of that began to change in August 2020 when Chewy founder Ryan Cohen bought 9 million shares in the retailer. He and two employees will join the board later in January 2021. “GameStop must evolve into a technology company that excites gamers and offers exceptional digital experiences – and not remain a video game retailer who over-prioritizes their physical presence and stumbles into the online ecosystem,” said Mr. Cohen in a public letter to the board of directors loved it, sending stocks in an initial run from $ 4 to $ 40. Mr. Cohen wasn’t just talking about improving e-commerce (a strategy that may have worked 15 years ago), instead he talked about fundamental changes in the business from GameStop, which could create a new, revitalized player in the $ 180 billion gaming industry. Change won’t happen easily. And that’s where Reddit investors come in. To date, Mr. Cohen owns only 13% of the company That is not enough to remove the existing GameStop board. Last year the Vor fought back stood against another activist investor with big plans for change. To be clear, current CEO George Sherman or his team are not particularly disgraceful. (Redditors, please don’t send pizzas to your home at 1am.) In good times it is already difficult to run a declining business, and in times of crisis it is nearly impossible. But to become an agent of change, Mr. Cohen needs more than his voice in the video game retailer. He needs other support from investors. Reddit investors, unite! So far, Reddit investors have been adding to GME shares using a financial quirk known as delta-gamma hedging. It happens when many investors buy calls out of the money – the lottery tickets preferred by the crowd of r / WallStreetBets. And in one of Wall Street’s least understood processes, as prices go up, market makers will buy more GME stock to hedge their positions. This creates a feedback loop that drives prices even higher. But for GameStop to hit (and stay there) a price tag of $ 500, Redditors need more than Wall Street’s quirks. To achieve more, they need the four instruments of activist investors: invest, strategize, agitate and vote. Activist Investing 101 In activist investing, there is the obvious first step: Investors must buy and hold GameStop stock. Options can make you fabulously rich, but only common shareholders can vote in general meetings. Next, investors need to strategize what’s best for GameStop. Vacuuming the lifeblood of a dying company can make shareholders some cash, but it won’t make GME a $ 35 billion company. No attempt is made to beat established players like Twitch or Valve in their own game. Instead, winning strategies include identifying technologies that went back a decade and investing before others. (A virtual reality universe, anyone?) Third, shareholders need to make their voices heard – something Redditors seem to be doing pretty well already. With a single well-crafted public letter to the board (plus some business in the back room), Mr. Cohen managed to get three seats on the board. Smaller investors may not share the same platform, but they can undoubtedly put pressure on the GME board to move faster. And finally, the shareholders have to vote. Most investors typically outsource their voting to their brokers, making annual meetings an ordeal. But if shareholders don’t come to the rescue of Mr. Cohen, change won’t come fast enough. GME Stock Reddit time is running out and Mr. Cohen needs to work fast. Thanks to years of corporate debt, GameStop now has 3.5 times the debt ratio. The retailer spends over $ 300 million on interest, maintenance, and leasing costs, which blows its $ 446 million cash supply faster than most people expect. Mr. Cohen probably saw the writing on the wall. Without drastic changes, GameStop’s chances will melt faster than the ice cream cone that Mr. Cohen mysteriously posted on Twitter this week. This is what makes the resignation of CFO Jim Bell on Wednesday so remarkable. Clearing the janitorial ranks is an essential first step in reversing the trend, and Mr. Cohen appears to have pulled the board out of its crisis. But more has to be done. And Mr. Cohen needs your help, Reddit. For GameStop to reach $ 500, the company needs a market cap of $ 35 billion or more than the value of Twitch and Steam combined. A second offering at $ 150 per share would be a start. A dilution of around 10% would make $ 1 billion, which AMC Entertainment (NYSE: AMC) did during its January stock run-up. But money alone won’t solve GameStop’s demise. The company urgently needs a new vision in its leadership positions. Hiring a new COO would be a good first step – the company hasn’t bothered about it since 2019. Establishing a long-term strategy (and finding the right person for the job) would be even better. In short, GameStop needs a strategy change that should even make Netflix (NASDAQ: NFLX) co-founder Reed Hastings nod in agreement. Mr. Cohen has worked his magic on Chewy.com before. And maybe he’s the right person to take on the top job at GameStop. But before he can go down this path, the 35-year-old founder needs all the help he can get. And with a megaphone powered by Reddit, retail investors finally have the opportunity to achieve this. Good luck, Redditors. See you on the moon. At the time of this writing, Tom Yeung held positions (neither directly nor indirectly) in the securities identified in this article. Tom Yeung, CFA, is a Registered Investment Advisor committed to making the world of investing easier. More From InvestorPlace Why Everyone Is Investing In 5G All FALSE Top Stock Pickers Reveal Their Next Potential Winner It doesn’t matter whether you’re making $ 500 million or $ 5 million in savings. Do this now. # 1 Game To Profit From Biden’s Presidency Redditor’s post, Ryan Cohen Needs Your Help To Return GME Stock to $ 500, first appeared on InvestorPlace.