Can GameStop benefit from its astronomical valuation?
By now, you all know how a group of novice traders bested Wall Street elite at their own game and caused stock prices for GameStop, Blackberry, AMC and others to skyrocket. I won't waste time replaying it or discussing it further. What I want to discuss is how the rising stock price affects these companies. Can they somehow benefit from their astronomical valuations to improve their operations and change their destiny? However, under more normal circumstances, a soaring share price could be cashed in — the company could issue new shares to meet the overwhelming demand and then use that cash to invest in the business. That's something Tesla and NIO have done a few times since their stocks took off in 2020.
The problem is that demand for the shares is soon going to vanish just as quickly as it arrived, and the entire point of the short squeeze is that it is predicated on a relatively thin supply of shares being available for sale in the market. So GameStop or AMC issuing a few million new shares could kill the momentum. At the current prices, these companies would still raise a few billion dollars of fresh capital, helping themselves to survive and who knows, maybe acquire other companies and thrive long after this story ends.
Issuing stocks requires an investment bank to underwrite the offering, guaranteeing a certain (usually slightly discounted) price for those new shares. I can't imagine any bank willing to do so when the stocks are bouncing like crazy over the space of a few hours or even minutes. But you who knows, Wall Street never ceased to amaze.
Are they set to flourish?
It's ironic, but the inflated share prices don't affect the day-to-day operations of these companies in the slightest. Take GameStop for example, its shareholders are a lot richer, but the business of selling video games and consoles is unchanged, and it is not coming back to the mall. And it's only a matter of time before AMC and Bed Bath and Beyond go bankrupt.
The problem is that demand for the shares is soon going to vanish just as quickly as it arrived, and the entire point of the short squeeze is that it is predicated on a relatively thin supply of shares being available for sale in the market. So GameStop or AMC issuing a few million new shares could kill the momentum. At the current prices, these companies would still raise a few billion dollars of fresh capital, helping themselves to survive and who knows, maybe acquire other companies and thrive long after this story ends.
Issuing stocks requires an investment bank to underwrite the offering, guaranteeing a certain (usually slightly discounted) price for those new shares. I can't imagine any bank willing to do so when the stocks are bouncing like crazy over the space of a few hours or even minutes. But you who knows, Wall Street never ceased to amaze.
Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.
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