GameStop (NYSE: GME) is capturing headlines since it announced a 4-for-1 stock split after the markets closed on Wednesday, July 6. The brick-and-mortar game retailer's shares spiked on the day following the announcement.
The recent news has some investors asking if it's a good opportunity to buy GameStop stock. What follows is an explanation of what the stock split could mean for investors, and an evaluation of the question of whether GameStop stock is a buy.
GameStop's stock split is almost meaningless.
GameStop's board of directors approved a 4-for-1 stock split that will take effect on July 22. After the markets close on July 21, shareholders will receive a dividend of three additional shares of the company's common stock for each share they hold. However, ownership percentages will not change. Shareholders will have their shares split into smaller slices.
It's similar to buying half of a pizza. Regardless of how many pieces you slice that half into, you're still left with half a pizza. So why is GameStop conducting a stock split if it means no change in ownership -- or much else, to be frank? Arguably to take advantage of the interest from enthusiastic retail investors over stock splits.
GameStop's stock split is no reason to buy the stock.
Given that the stock split is almost meaningless, it is no reason to consider buying GameStop stock. Moreover, since GameStop's stock is overvalued and in a declining industry, there was little reason before the announcement to buy the stock either. The company was part of the meme stock frenzy in 2021, which caused its share price to soar despite declining performance.
Indeed, GameStop has lost money on the bottom line for four consecutive years, and revenue has fallen by a compound annual rate of 4.5% over the last decade. The trouble arises from its business model, which is buying and selling physical copies of games while people are increasingly shifting to digital purchasing. There is no quick path for the company to pivot to stop bleeding money.
Meanwhile, GameStop is trading at a price-to-sales ratio of 1.6, substantially higher than its valuation before meme stock investors poured in. Additionally, it is more expensive than brick-and-mortar retailers Costco (NASDAQ: COST), Walmart (NYSE: WMT), and Target (NYSE: TGT) -- all of which have significantly better prospects in the near and long term than GameStop.
Investors would be prudent not to be enticed by gimmicks like stock splits and social media chatter and focus more on a company's fundamental performance in revenue and profits. In other words, GameStop stock is not a buy because of the stock split.
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