It's an important week for GameStop shareholders. On Thursday, July 21, the stock will undergo a 4-for-1 split. That means, for every one share that they own, GME investors will receive three additional shares.
Technically speaking, stock splits don't really have any effect on the company's long-term valuation. However, there can be positive short-term effects that investors should be aware of.
Here's what the split means for GME shareholders, as well as why it could be a bullish event for GameStop's stock this week.
What You Need to Know About the 4-for-1 Split
GameStop proposed a stock split back in April, and shareholders voted to approve the plan in June. This month, the company's board of directors determined that the split should be made with a 4-for-1 ratio and take effect on July 21.
That means, every GameStop shareholder of record at the close of the trading session on July 18 will receive three additional shares of the company's common stock for every one stock they already own.
Based on GME's closing share price on July 15 — $141 — each share will then be worth $35.25. This is due only to the number of outstanding shares increasing from 76.13 million to 304.52 million, not to an increase in net assets.
What Effects Will the Stock Split Have?
Theoretically speaking, a stock split does not add any fundamental value to a company's business.
From a practical point of view, it has a bigger effect in the options market, where a standard put or call contract requires 100 shares of an underlying asset. By affecting the split, GME options will be more accessible to retail investors.
But perhaps the biggest effect of a stock split is psychological. Some studies point out that stock splits tend to generate rallies in the company's share price in the short term.
Recent stock splits like Tesla's are an example of this. Shares of the electric vehicle maker jumped more than 50% in the days after the announcement of a 5-for-1 split in August 2020. That same year, Apple’s 4-for-1 split also caused an immediate rally of over 16%.
Could the Split Hurt Short Sellers?
Bronte Capital, a hedge fund that reportedly has short positions in GameStop and other meme stocks, issued a letter to its clients highlighting that it was aware of what effects a GameStop stock split could have.
"Not accepting that stock splits add value is a recipe for losing money," the firm wrote.
In April, the announcement of GameStop's stock-split plans caused shares to jump 15% right away. As recently as the beginning of July, shares increased an extra 10% after GameStop's Board approved the split.
Considering the impacts that the stock split has already had on GameStop shares, its actual occurrence will likely be a short-term catalyst that pressures short sellers to cover their margins.
Short interest in GameStop currently sits at nearly 20% of its float. That indicates short sellers are still determined to bet against the stock, even if that means playing with fire.
Despite high volatility, GameStop has been outperforming the S&P 500 this year. GME shares are down just 3% since the beginning of 2022, while the SPDR S&P 500 ETF Trust is down 18% over the same period.