Summary
- GameStop’s stock dropped nearly 25% after the company announced plans to issue debt for buying Bitcoin.
- GameStop plans to finance its cryptocurrency investment with convertible senior notes, a type of high-priority loan.
- Investors seem skeptical of this plan, not least because it comes at a time when GameStop’s core business continues to erode.
GameStop stock price cratered nearly 25% after the company announced plans to issue debt in order to invest in Bitcoin. The news appears to have shaken investors’ confidence in GameStop‘s already-embattled prospects.
GameStop has been struggling in the digital age, with its business model being threatened by an overall decline in physical video game sales. The company found a major financing lifeline thanks to an early 2021 market rally propelling it to meme stock status. However, save for a short-lived reversal in 2022, its revenue has been on a steady decline for over a decade at this point.
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Although the embattled retailer is still trading at an extremely high P/E ratio of 66, its stock price took a massive hit on March 27, after GameStop announced plans to issue $1.3 billion worth of debt for “general corporate purposes,” of which it only named one: Bitcoin investments. Its share price fell almost 25% on the back of this news, dropping as low as $21.16, suggesting that the public markets are bearish about GameStop committing to yet another cryptocurrency-reliant endeavor.
GameStop’s Convertible Senior Notes Explained
GameStop is looking to finance its Bitcoin investment with a private offering of something called convertible senior notes. A senior note is a type of loan that gets priority in case a company goes bankrupt, meaning the lender will get paid back before others during asset liquidation. The “convertible” part means that lenders have the option of converting the money they are owed into shares. If a company does well with the loan, converting the owed amount to equities typically yields higher returns than merely accepting cash in return, as the shares get converted at the price they were at when the loan took place. Since GameStop’s convertible senior notes won’t bear regular interest (which is somewhat unusual, though not unheard of), converting them to shares will be the primary way of making money for its lenders.
Why Is GameStop’s Stock Price Cratering?
Convertible senior notes are fairly common across several industries and company types, and typically don’t raise eyebrows if used in moderation. The issue with GameStop’s initiative—and the likely reason its stock price is cratering—isn’t the nature of this financial instrument but what GameStop intends to do with it. Bitcoin is still a largely speculative asset with no intrinsic value, so spending hundreds of millions of dollars on it while it’s close to its all-time high valuation is a fairly risky move, to put it mildly.
The move is seen as particularly problematic in light of the fact that the company’s core business continues to erode. Rather than addressing this structural decline, the group now appears to be leaning into speculative assets as a distraction or stopgap—all the while continuing to cut costs by closing physical GameStop stores the world over. While this strategy has kind of worked out so far due to how massive the retailer is, thus having plenty of opportunities to “find” money by cutting costs via closures of underperforming locations, there is only so much fat left to cut. Eventually, GameStop will need to find new revenue streams to stay in business, and its recent stock price slide signals that investors aren’t convinced Bitcoin speculation qualifies as a sustainable path forward.
