GameStop (NYSE:GME), a retailer of video games, consumer electronics, and gaming merchandise, has now managed to turn green for the year after the stock experienced severe turbulence in the recent past. In today’s volatility-rich environment, GameStop’s announcement to seek shareholder approval for a stock split plan has supercharged the bulls.
To wit, GameStop revealed via a filing with the SEC last week that it was contemplating a stock split which, in turn, requires shareholder approval for an increase in the company’s “number of authorized shares of Class A common stock from 300,000,000 to 1,000,000,000 through an amendment to the Company’s Third Amended and Restated Certificate of Incorporation”.
As a refresher, a stock split occurs when a company grants its existing shareholders additional shares based on a pre-approved multiple. For instance, a 3-to-1 stock split grants three additional shares for each share held by existing shareholders. At the same time, the stock price is adjusted accordingly so that the overall value of investors’ position is not affected. In the above example, if the stock were trading at a $90 price before the split, its price would be adjusted to $30 after the 3-to-1 stock split. Consequently, on a theoretical level, a stock split does not affect the portfolio value of investors, with the move entailing only ancillary benefits such as improved liquidity.
However, the recent anecdotal evidence suggests that stock splits are, in fact, harbingers of sizable stock price gains, which bodes well for GameStop’s prospects. Of course, psychological factors are the primary stimulant behind this outperformance. As an illustration, a stock split conveys to investors that the price of a particular stock has registered sizable gains and that this trend of outperformance will continue for the foreseeable future. It is this psychology that prompts stock price gains in the aftermath of a stock split.
This brings us to the crux of the matter. Tesla (NASDAQ:TSLA), incidentally, is a valid case study for GameStop’s post-stock split performance. For instance, both stocks have been marred by high short interest and a vocal group of detractors in the recent past. Moreover, both stocks continue to remain in the focus of retail investors who have been the primary historical drivers behind much of the post-split upward ramp.
The above snippet describes Tesla’s post-split performance. As is evident, the stock clocked in gains of over 300 percent between the announcement of a stock split and the receipt of additional shares, with the stock rising from $350 to $2,210. After undergoing this 5-to-1 split, the stock price was adjusted to $442. However, Tesla shares maintained their upward trajectory even after the consummation of this move, with the stock recording an all-time high of $1,243.49 in November 2021, equating to $6,217 in pre-stock split price terms. This entire journey consists of gains of 1,776.11 percent.
Given this historical precedence and the obvious similarities between the two stocks, GameStop has a decent shot at crossing the $250 resistance, with a material probability of a Tesla-like price explosion. Of course, with short interest in excess of 22 percent of its float, as per a tabulation by Ortex, such a move is likely to unleash quite a lot of pain on the stock’s short-sellers, prompting at least a partial short-covering and adding to GameStop’s overall tailwind.