Shares of Reddit-revered GameStop are under pressure after the video-game retailer said it is considering cashing in on its meteoric stock rise to fund its e-commerce plans.
Shares of Reddit favourite GameStop Corp fell more than 14 percent before the opening trading bell on Wednesday after the video-game retailer said it might cash in on a meteoric rise in share price to fund its e-commerce expansion.
GameStop has surged nearly 900 percent so far this year, and at the peak of the trading frenzy on January 28 the shares had touched $483 apiece.
After reporting quarterly results, the company said on Tuesday that it has been considering since January whether to increase the size of the $100m share sale that it originally announced in December.
GameStop previously decided against the move as it was restricted under United States financial regulations from selling shares because it had not yet updated investors on its earnings.
The stock sale programme was assigned to Jefferies, whose brokerage arm on Wednesday raised its price target by a whopping $160 to $175, but kept rating at “hold”.
That is much higher than the median price target of $25, according to Refinitiv data, and marks the first time a Wall Street brokerage matched its price projections with GameStop’s current trading levels.
Reddit’s WallStreetBets forum was buzzing about another potential short squeeze, which had sent GameStop’s shares as high as 2,300 percent in January when retail investors acted in concert to bid up prices of heavily shorted stocks.
A short squeeze occurs when hedge funds that bet against a stock need to buy it at much higher levels to cover losing positions.
Short interest in GameStop has since fallen, standing at about 24.3 percent of the stock’s float as of March 9 compared with 32.6 percent in late February, according to data from financial analytics firm S3 Partners.
The shares were last down at $155.25. The company on Tuesday reported a ninth straight decline in quarterly sales and said it will close more retail stores and exit unprofitable businesses, underscoring Wall Street’s concerns about its business.
GameStop also skipped a question-and-answer session after the results.
Wedbush analysts downgraded the stock to “underperform” from “neutral”, saying the short squeeze had boosted the share price to levels that were completely disconnected from the fundamentals of business.
Billionaire investor and Chewy.com co-founder Ryan Cohen, who is on GameStop’s board, expects to transform the retailer into an e-commerce firm that can take on big-box players Target Corp and Walmart Inc and technology firms such as Microsoft Corp and Sony Corp.
“Our downgrade is not a reflection of our opinion of company management, which remains very high; rather, it appears that the ‘real’ value of GameStop shares vastly exceeds the ‘fundamental’ value,” Wedbush analysts said in a research note.
Of the seven analysts covering GameStop, none has a “buy” or a higher rating on the stock.