GameStop tumbles as Reddit darling considers share sale

Shares of Reddit-favorite GameStop Corp fell more than 14% before the bell on Wednesday after the videogame retailer said it might cash in on a meteoric rise in share price to fund its e-commerce expansion.

GameStop has surged nearly 900% so far this year and at the peak of the trading frenzy on Jan. 28 the shares had touched $483 a piece.

The company said on Tuesday after reporting quarterly results that it has been considering since January whether to increase the size of the $100 million share sale that it originally announced in December.

GameStop previously decided against the move as it was restricted under US financial regulations from selling shares because it had not yet updated investors on its earnings.

The stock sale program was assigned to Jefferies, whose brokerage arm on Wednesday raised its price target by a whopping $160 to $175, but kept rating at "hold".

That is much higher than the median price target of $25, according to Refinitiv data, and marks the first time a Wall Street brokerage matched its price projections with GameStop's current trading levels.

Reddit's WallStreetBets forum was buzzing about another potential short squeeze, which had sent GameStop's shares as high as 2,300% in January when retail investors acted in concert to bid up prices of heavily shorted stocks.

A short squeeze occurs when hedge funds that bet against a stock need to buy it at much higher levels to cover losing positions.

Short interest in GameStop has since fallen, standing at about 24.3% of the stock's float as of March 9 compared with 32.6% in late February, according to data from financial analytics firm S3 Partners.

The shares were last down at $155.25. The company on Tuesday reported a ninth straight decline in quarterly sales and said it will close more retail stores and exit unprofitable businesses, underscoring Wall Street's concerns about its business.

GameStop also skipped a question and answer session after the results.

Wedbush analysts downgraded the stock to "underperform" from "neutral", saying the short squeeze had boosted the share price to levels that were completely disconnected from the fundamentals of business.

Billionaire investor and Chewy.com co-founder Ryan Cohen, who is on GameStop's board, expects to transform the retailer into an e-commerce firm that can take on big-box players Target Corp and Walmart Inc and technology firms such as Microsoft Corp and Sony Corp.

"Our downgrade is not a reflection of our opinion of company management, which remains very high; rather, it appears that the 'real' value of GameStop shares vastly exceeds the 'fundamental' value," Wedbush analysts said in a research note.

Of the seven analysts covering GameStop, none has a "buy" or a higher rating on the stock.