Redditors, Ryan Cohen Needs Your Help to Send GME Stock Back to $500
In 2015, the Financial Times joked that RadioShack, an ailing brick-and-mortar electronics chain, should consider selling fruit baskets or turning its stores into Zumba studios to survive. The retailer had ignored the threat of e-commerce for so long that few believed it could survive. Two years later, RadioShack was virtually no more. Source: TY Lim / Shutterstock.com Today, GameStop (NYSE:GME) stock sits at a similar juncture. Since the early 2010s, GME’s top brass had treated the retailer like drunks at an open bar — doling out a princely dividend to shareholders (and stock options to themselves) while cutting reinvestment into aging stores. But then something happened: A group of retail investors, driven by Reddit’s hedge-fund-hatin’ r/WallStreetBets decided to take GME stock from $10 to $480 in a matter of weeks. The people still love GameStop!InvestorPlace – Stock Market News, Stock Advice & Trading Tips This love for GameStop and disdain for Wall Street is an unusual combo. It means that, unlike RadioShack in 2015, the video game retailer still has a fighting chance. For the good of GameStop and its shareholders, Reddit investors need to finish the revolution they started. And if they do, Redditors and Chewy (NYSE:CHWY) founder Ryan Cohen can still send GME stock back to $500. GME Stock: Intentionally Driven into a Ditch Anyone who’s recently visited a GameStop store will tell you the same thing: They look old. And that’s by design. For over a decade, GameStop’s management has enriched shareholders at the expense of the firm. GameStop’s capital expenditure, the budget used to maintain its stores, peaked in 2011 at almost $200 million before getting cut in favor of larger dividends and share buybacks. Meanwhile, the company’s stores have continued to age, and layoffs have continued unabated. Yet, shareholders allowed then-CEO J. Paul Raines to maintain the course. Why? It made them money. Customers, employees and other stakeholders weren’t a priority. And after several failed acquisitions, including game developer Kongregate, GameStop’s management decided that milking the company for cash was a better bet. The firm’s blind commitment to mediocrity reached a peak at the April 2020 strategy meeting. There, GameStop management outlined a plan to “optimize the core” and “become the social / cultural hub for gaming” through building “experiential labs.” In other words, they wanted to drive more in-store traffic. During a pandemic year. (How on earth did management earn $35 million between them?) Change Afoot? Redditors Think So. All that began to change in August 2020, when Chewy founder Ryan Cohen bought 9 million shares of the retailer. He and two associates would later join the board in January 2021. “GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences — not remain a video game retailer that over-prioritizes its physical presence and stumbles on the online ecosystem,” said Mr. Cohen in a public letter to the board. Investors were delighted, sending shares on an initial run from $4 to $40. Mr. Cohen wasn’t just talking about improving e-commerce (a strategy that might have worked 15 years ago). Instead, he spoke of fundamental changes to GameStop’s business that could create a new, revitalized player in the $180 billion gaming industry. Change, however, won’t come readily. And that’s where Reddit investors come in. To date, Mr. Cohen only owns 13% of the company. That’s not enough to dislodge GameStop’s existing board; as late as last year, the board fought off another activist investor with grand plans for change. To be clear, there’s nothing particularly nefarious about current CEO George Sherman or his team. (Redditors, please don’t send pizzas to his house at 1 a.m.) Managing a declining business is already hard during good times and nearly impossible during crises. But to become an agent of change, Mr. Cohen needs more than his vote in the video game retailer. He needs other investor support. Reddit Investors, Unite! To date, Reddit investors have driven up GME stock using a financial quirk known as delta-gamma hedging. It happens when many investors buy deeply out-of-the-money calls — the lottery tickets favored by the r/WallStreetBets crowd. And in one of Wall Street’s least-understood processes, as prices rise, market makers will buy more GME stock to hedge their positions. That creates a feedback loop that pushes prices even higher. But for GameStop to reach a $500 price (and stay there), Redditors will need more than Wall Street’s quirks. To do more, they will need the four tools of activist investors: invest, strategize, agitate and vote. Activist Investing 101 There’s the obvious first step with activist investing: Investors need to buy GameStop shares and hold on. Options can make you fabulously wealthy, but only common stockholders can vote in shareholder meetings. Next, investors need to strategize what’s best for GameStop. Sucking the lifeblood out of a dying company can make shareholders some money, but it won’t turn GME into a $35 billion firm. Neither will trying to beat established players like Twitch or Valve at their own game. Instead, winning strategies will involve identifying technologies a decade out and investing before others do. (A virtual reality universe, anyone?) Third, shareholders need to make their voices heard — something Redditors seem pretty good at doing already. With a single well-crafted public letter to the board (plus some backroom dealing), Mr. Cohen managed to gain three board seats. Smaller investors might not have the same platform, but they can undoubtedly start pressuring GME’s board to move faster. And finally, shareholders need to vote. Most investors typically outsource voting to their brokerages, making annual meetings a rubber-stamp ordeal. But unless shareholders come to Mr. Cohen’s aid, change won’t come fast enough. Time Is Running Out for GME Stock Reddit and Mr. Cohen will have to work fast. Thanks to their years of corporate debt binging, GameStop now sports a 3.5x debt-equity ratio. The retailer spends over $300 million in interest, upkeep and leasing costs, which will burn through its $446 million cash hoard faster than most people expect. Mr. Cohen has presumably seen the writing on the wall. Without drastic changes, GameStop’s chances will melt away faster than the ice cream cone that Mr. Cohen mysteriously posted on Twitter this week. That’s what makes CFO Jim Bell’s resignation on Wednesday so remarkable. Clearing the caretaker ranks is an essential first step to a turnaround, and Mr. Cohen seems to have pulled the board out of its slump. But more still has to happen. And Mr. Cohen needs your help, Reddit. For GameStop to reach $500, the firm would need a $35 billion market capitalization, or more than the value of Twitch and Steam combined. A secondary offering at $150 per share would be a start. A roughly 10% dilution would raise $1 billion, something AMC Entertainment (NYSE:AMC) did during its January stock run-up. But money alone won’t solve GameStop’s decline. The firm desperately needs a new vision among its management ranks. Re-hiring a COO would be a good first step — the firm hasn’t bothered with one since 2019. Charting a long-term strategy (and finding the right person for the job) would be even better. In short, GameStop needs a strategy shift that should make even Netflix’s (NASDAQ:NFLX) co-founder Reed Hastings nod in approval. Mr. Cohen has worked his magic on Chewy.com before. And maybe he’s even the right person to take the top job at GameStop. But before he can start down that route, the 35-year-old founder will need all the help he can get. And with a Reddit-fueled megaphone, retail investors finally have the chance to make that happen. Good luck, Redditors. I’ll see you guys on the moon. On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing. More From InvestorPlace Why Everyone Is Investing in 5G All WRONG Top Stock Picker Reveals His Next Potential Winner It doesn’t matter if you have $500 in savings or $5 million. Do this now. #1 Play to Profit from Biden’s Presidency The post Redditors, Ryan Cohen Needs Your Help to Send GME Stock Back to $500 appeared first on InvestorPlace.