Why GameStop Stock Dropped Today

What happened

GameStop (NYSE: GME) shareholders lost ground to the market on Monday as the stock had fallen 7% by 3 pm ET compared to a slight uptick in the S&P 500. The specialty retailer is still beating the market so far in 2022, but its gains have lessened in recent days.

The stock price slump came as investors questioned the financial benefit of the company’s proposed stock split.

Image source: Getty Images.

So what

GameStop announced in late March that it is planning to roughly triple the number of authorized shares of its common stock, up to 1 billion. That boost will allow the video game retailer to perform a stock split, which multiplies the number of shares in an investor’s account while lowering the per-share value.

A stock split does not add any value to a business, but GameStop’s stock still soared by over 20% immediately following the news. Monday’s retreat may reflect Wall Street’s judgment that this rally did not have a solid foundation.

In fact, an aggressive stock split might even be a bad move for the shareholders, as it could expose GameStop to delisting risks if its market capitalization falls back toward the valuation it had held before the “meme stock” craze.

Now what

GameStop will put the stock split to a vote in the company’s annual meeting with shareholders, which has not yet been scheduled. Investors will learn key details by then about GameStop’s planned split, including why management believes this is the right time to perform the move.

Yet the broader investing picture is not bright for this stock. GameStop executives declined to issue a 2022 sales and earnings outlook last month, citing the “early stages” of the company’s transformation plan. It is not clear today whether the retailer can reliably grow sales, let alone profits, as video game spending moves further into online channels.

That’s why even investors with high risk tolerances should be careful about jumping into this stock in hopes of earning positive returns.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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