Shares in GameStop Corp plunged 12 percent on on Monday it announced the plans for selling as much as $1 billion worth of stock.
It was obvious that GameStop was taking advantage of the unbelievable market rally it saw after a Reddit-driven buying frenzy earlier this year.
Redditors rallied to the company after the US videogame chain as targeted by short sellers, driving the share price almost 2,500 percent at one time.
GameStop said it is planning to sell up to 3.5 million shares. It said it intends to use the money fast-track its move to e-commerce enterprises.
Reuters calculated that as per Thursday's closing price of $191.45, share sale could earn around $670 million for the company. After the insane share boom, which ended up with a net gain of 900 percent, gave the company a valuation of about $34 billion at one point.
However, the business reported net loss of $18.8 million in the third quarter of 2020 while, the losses for the the same period in 2019 stood at $83.4 million.
However, in another important metric, the net sales shrunk $1 billion, compared to $1.4 billion in the previous year.
The Reddit-Driven Share Surge
A group of Reddit users on a sub-Reddit called 'WallStreetBets' discovered that hedge funds including Melvin Capital and Citron Research held short positions – a trade in which you expect the stock to fall and benefit from the transaction – in GameStop and the popular brick and mortar video game store was about meet its financial end.
However, the Reddit group's 2-million strong army was not going to let that happen. The Redditors bet against the Wall Street hedge fund and other short sellers of GameStop, pumping up the price of GameStop from $20 to more than $460 on Thursday. Besides GameStop, the social media users also drove up the price of other stocks including AMC Cinemas, Bed Bath & Beyond, Nokia etc in what is referred to as a "short squeeze."
It was pointed out that GameStop has not been able to cash in on the share surge so far due to regulatory restrictions.