GameStop shares dropped sharply on Thursday as its strategy to issue debt to finance bitcoin purchases raised concerns among investors on Wall Street.
The video game retailer declared a private offering of $1.3 billion in debt. Earlier this week, the company stated its intention to acquire bitcoin as a reserve asset, planning to utilize the proceeds from this debt issuance for the cryptocurrency purchase.
The stock fell by 22.1%, reversing a prior increase of 11.7% on Tuesday. GameStop’s shares, often grouped with other so-called “meme” stocks, are known for their volatility.
This debt offering is being made at a significant premium to the company’s overall value, potentially excluding a considerable segment of GameStop’s investors who may not meet the specific criteria to participate in the offering, according to an analysis from Wedbush led by analyst Michael Pachter.
“It’s difficult to comprehend why any investor would be willing to pay more than twice the cash value for GameStop’s potential to convert that cash into Bitcoin, especially when these investors have the option to invest directly in Bitcoin or a Bitcoin ETF themselves,” he noted in the report.
The company currently holds around $4.8 billion in cash, and the conversion could raise its cash reserves to $6.1 billion, Pachter added. Presently, GameStop’s stock is valued at approximately $12.7 billion.
GameStop shares have significantly declined since last May when notable investor Keith Gill, known as “Roaring Kitty,” appeared online for the first time in three years to express his support for the stock.
Gill played a pivotal role in sparking a “meme” stock phenomenon in early 2021, when GameStop’s shares surged beyond $120.
“Despite lacking a clearly defined strategy, GameStop has consistently managed to benefit from a ‘greater fool’ willing to invest more than twice its asset value for its shares, and so far, this approach has proven effective,” Pachter remarked.
While expressing reservations about the note offering and bitcoin initiative, Wedbush analysts mentioned in a separate report that they were “impressed” by GameStop’s capacity to generate an operating profit in the fourth quarter of 2024 and feel “more confident than ever that GameStop can achieve breakeven results in the foreseeable future.”
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