- Video games retailer unveils four-for-one stock split

- Investors to get three new shares for each one held 

- Cynical marketing drive could take advantage of novice investors

Fallen meme stock GameStop (GME:NYSE) is pulling out the cheap marketing tricks after announcing four-for-one stock split overnight that will do nothing for the investment proposition.

It appears to have worked, in the short-term anyway, with the video games retailer’s share price jumping 9% in after-hours trading to $117.43.

Experienced investors will know that splitting the stock into smaller parts changes nothing for a company’s investment pedigree, it simply spreads earnings over an expanded share base with a corresponding lower share price, so a net/net zero change.

It can be argued that in extreme cases a share split can make a stock more readily available to smaller investors. For example, Alphabet’s (GOOG:NASDAQ) shares are trading at $2,304. That makes it difficult for many people to buy direct exposure to the company when they might only be able to set aside a couple of hundred pounds a month for investment.

To ease this issue, Alphabet has decided to split its shares into 20 smaller parts, set to take effect next week after the market closes on 15 July.

Let's say an Alphabet investor has one share worth $2,304. After the share split they will own 20 shares priced at $115.20, but their overall investment will still be worth $2,304 if we assume no change to the value of the business.

SOLVING A NONEXISTENT PROBLEM

In GameStop’s case, there isn’t a small investor accessibility problem to solve, making its stock split look like a cynical exercise in short-term marketing.

GameStop presumably believes novice investors will jump in with the mistaken impression that shares in the company can be bought on the cheap when, in fact, the valuation of the business will remain unchanged.

GameStop stock is down about 23% in value year-to-date and has nearly halved since November 2021 as the meme stock frenzy that saw its share price surge to $325 about 18 months ago faded.

The cost of living crunch has been eating into GameStop trading this year with the company reporting significantly wider losses ($2.08 per share) than expected by analysts ($1.45), with inventories soaring.

Investors have also aired substantial doubts about the company’s move into NFTs, or non-fungible tokens, a digital form of asset.

The four-for-one stock will be in the form of a stock dividend, with registered shareholders on 18 July set to receive a dividend of three additional shares for each share held. The stock dividend will be distributed after the close of trading on 21 July, the company said.

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Issue Date: 07 Jul 2022