GameStopit is (GME -4.87%) the stock split announcement was ultimately dropped. Investors have been waiting for the move since March after the video game retailer dramatically increased the number of shares outstanding from 300 million to 1 billion in a bid to split the stock.
The shares will be split at a four-to-one ratio, meaning that for every share you own, you get three more, but each will be worth a quarter of the price it was trading at before. So, with GameStop recently closing around $135 per share, an investor with 10 shares will now own 40 stubs instead, but each will only be worth $33.75.
Unfortunately, the “mother of all short cuts,” or MOASS, that stock traders have always been waiting for won’t happen. Just because GameStop’s split will take the form of a “dividend” doesn’t mean it will have any particular impact on short sellers. Yes, they will have to buy back four times as many shares, but their price will be lower, as will investors who are long on the stock.
play the system
GameStop, of course, is one of the premier meme stocks on the market, often trading more on the amount of chatter generated on social media and Internet stock discussion forums than on company fundamentals. In these circles, the self-proclaimed “monkeys” encouraged each other to stand firm and not sell their shares because a short squeeze, or a rapid and noticeable rise, in GameStop’s stock price was imminent.
The video game retailer remains a heavily shorted stock – more than a fifth of its shares are sold short. So when GameStop said it would split its stock as a dividend, it was seen as the catalyst to set MOASS in motion. But that’s not how it works.
A special type of dividend
Most people are familiar with a cash dividend, where a company pays you a portion of its profits every month, quarter, or other interval. As I explained once before, GameStop considering its stock ownership a dividend is more a type of boilerplate language than a mantra with special powers.
Another heavily shorted title, You’re herealso said he would split his shares as a dividend, as many companies do. AlphabetThe 20-for-1 stock split on July 15 will be in the form of a special dividend.
By declaring the split as a dividend, a company is only changing its accounting, essentially the amount it keeps in its retained earnings account, and not much else. GameStop’s stock dividend won’t affect its cash balances the way it would if it issued a cash dividend (which could cost short sellers a lot of money), and the split won’t trigger a new one.” gamma compression” on its actions.
More important issues to address
While GameStop stocks don’t typically trade on their fundamentals, that doesn’t mean they never do. After announcing its stock split, the video game retailer also said it had fired its chief financial officer and laid off employees. After jumping 15% on news of the split, the stock fell again in the wake of layoffs and layoffs.
Meme stock traders like to claim that the game is rigged against them and that the Securities and Exchange Commission is allowing illegal or improper activity. These traders also benefit from the camaraderie that develops in chat rooms. Yet they also tend to reinforce the idea that if they hold out just a little longer, they might better wait for monetary interest against their stock and achieve significant wealth when MOASS occurs.
There may very well be a trigger event at some point, but GameStop’s stock split is not.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Rich Duprey has no position in the stocks mentioned. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares) and Tesla. The Motley Fool has a disclosure policy.