Redditors, Here’s How to Help Ryan Cohen Send $ 500 GME Stock

In 2015, the Financial Times joked that RadioShack, a struggling physical 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 practically no more.

Today, GameStop (NYSE:GME) is at a similar stage. Since the early 2010s, senior executives at GME have been treating the retailer like drunks in an open bar – handing out a princely dividend to shareholders (and stock options to themselves) while reducing reinvestment in aging stores.

But then something happened: A group of retail investors, pushed by Reddit’s hedge-fund-hatin ‘r / WallStreetBets, decided to take GME shares from $ 10 to $ 480 in a matter of weeks. People still love GameStop!

This love for GameStop and contempt for Wall Street is an unusual combo. This means that unlike RadioShack in 2015, the video game retailer still has a chance to fight. For the sake of GameStop and its shareholders, Reddit investors must complete the revolution they started. And if they do, Redditors and Soft (NYSE:ALL) Founder Ryan Cohen can still return GME shares at $ 500.

GME Stock: intentionally driven into a ditch

Anyone who has visited a GameStop store recently will tell you the same thing – they look old. And that’s by design. For more than a decade, the management of GameStop has enriched the shareholders to the detriment of the firm. GameStop’s capital expenditure, the budget used to maintain its stores, peaked in 2011 at nearly $ 200 million before being cut in favor of larger dividends and share buybacks. During this time, the company’s stores continued to age, and layoffs continued unabated.

Still, shareholders allowed then-CEO J. Paul Raines to stay the course. Why? It made them money. Customers, employees and other stakeholders were not a priority. And after several unsuccessful acquisitions, including game developer Kongregate, GameStop’s management decided that milking the company for cash was a better bet.

The company’s blind commitment to mediocrity peaked at the April 2020 strategy meeting. There, GameStop management presented a plan to ‘optimize the core’ and ‘become the social hub’. culture of play ”by building“ experiential laboratories ”.

In other words, they wanted to drive more store traffic. During a pandemic year. (How the hell did management make $ 35 million between them?)

Change on foot? The editors think so.

That all started to change in August 2020, when Chewy founder Ryan Cohen bought 9 million shares of the retailer. He and two associates will later join the board in January 2021.

“GameStop must evolve to be a tech company that thrills gamers and delivers exceptional digital experiences – don’t remain a video game retailer that over-prioritizes its physical presence and stumbles onto the online ecosystem,” Mr. Cohen said. in a public letter to the board of directors. .

Investors were thrilled, sending shares on a first run of $ 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 about fundamental changes in GameStop’s business that could create a revitalized new player in the $ 180 billion gaming industry.

Change, however, will not come easily. And that’s where Reddit investors come in.

To date, Mr. Cohen owns only 13% of the company. This is not enough to dislodge the existing map from GameStop; just last year, the board battled another activist investor with big plans for change.

To be clear, there is nothing particularly bad about current CEO George Sherman or his team. (Editors, please don’t send pizza to his house at 1 a.m.) Running a declining business is hard enough during good times and nearly impossible during crises.

But to become an agent of change, Mr. Cohen needs more than his vote at the video game retailer. He needs further support from investors.

Reddit Investors, Unite!

To date, Reddit investors have driven GME shares up using a financial quirk known as delta-gamma hedging. This happens when many investors buy deep-out-of-the-money calls – the crowd favorite lottery tickets at r / WallStreetBets. And in one of Wall Street’s least understood processes, as prices rise, market makers will buy more GME stocks to cover their positions. This creates a feedback loop that pushes the prices even higher.

But for GameStop to hit a price tag of $ 500 (and stay there), Redditors will need more than Wall Street oddities.

To do more, they will need the four tools of activist investors: invest, strategize, agitate and vote.

Investing activist 101

There is the obvious first step with activist investing: Investors need to buy GameStop shares and hold on. Options can make you fabulously rich, but only common shareholders can vote at shareholder meetings.

Next, investors need to figure out what’s best for GameStop. Sucking the lifeblood of a dying company may save shareholders money, but it won’t turn GME into a $ 35 billion company. Neither will try to beat established players like Twitch or Valve at their own game. Instead, winning strategies will involve identifying technologies in a decade and investing before others. (A universe of virtual reality, anyone?)

Third, shareholders need to make their voices heard – something Redditors already seem to be doing very well. With just one well-written public letter to the board (plus a few behind-the-scenes transactions), Mr. Cohen managed to win three seats on the board. Small investors may not have the same platform, but they can undoubtedly start to put pressure on GME’s board to move faster.

And finally, shareholders must vote. Most investors typically outsource the voting to their brokerage firms, making annual meetings a real test. But unless shareholders come to Mr. Cohen’s aid, change won’t come quickly enough.

Time is running out for GME stock

Reddit and Mr. Cohen will have to work quickly. Thanks to their years of corporate debt, GameStop now boasts a debt ratio of 3.5x. The retailer is spending more than $ 300 million on interest, maintenance and rental charges, which will burn off its $ 446 million stash faster than most people imagine.

Mr. Cohen probably saw the writing on the wall. Without drastic changes, GameStop’s chances will melt faster than the ice cream cone Mr. Cohen mysteriously posted on Twitter this week.

This is what makes CFO Jim Bell’s resignation on Wednesday so remarkable. Clearing the gatekeeper ranks is a vital first step towards a turnaround, and Mr. Cohen appears to have pulled the board out of its collapse. But there is still a lot to do. And Mr. Cohen needs your help, Reddit.

In order for GameStop to reach $ 500, the company would need a market cap of $ 35 billion, more than the combined value of Twitch and Steam.

A side bid at $ 150 per share would be a start. A dilution of around 10% would raise $ 1 billion, something AMC Entertainment (NYSE:AMC) did when it went public in January.

But money alone will not solve GameStop’s decline. The company is in desperate need of a new vision in its executive ranks. Rehiring an COO would be a good first step – the company hasn’t bothered about it since 2019. Mapping out a long-term strategy (and finding the right person for the job) would be even better.

In short, GameStop needs a change in strategy that should make it Netflix (NASDAQ:NFLX) Co-founder Reed Hastings nods.

Mr. Cohen has already worked his magic on Chewy.com. And maybe he’s even the right fit for the high-level job at GameStop. But before he can embark on this path, the 35-year-old founder will need all the help he can get. And with a megaphone powered by Reddit, retail investors finally have the chance to make it happen.

Good luck, Redditors. I’ll see you guys on the moon.

As of the publication date, Tom Yeung does not hold (neither directly nor indirectly) any position in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor whose mission is to bring simplicity to the world of investing.