GameStop Is Soaring Again, But Why Aren’t Its Bonds?
(Bloomberg Opinion) -- So you heard in January about the huge rise in shares of GameStop Corp., or what Tesla Inc.’s Elon Musk called #Gamestonk. You might even be aware that the stock is surging again, with a rally nearing 100%.
But have you heard about ... #Gamebond?
Probably not. Yet GameStop does have some corporate debt outstanding: A $216 million bond with a 10% coupon that was issued in June and matures in March 2023, and a $73 million security with a 6.75% coupon from 2016 that comes due in less than a week. Obviously, there’s little doubt that the latter obligation will be paid on time and in full.
GameStop’s two-year bond, on the other hand, tells an interesting story — one that strikes a much more cautious tone about the likelihood that Chewy Inc. founder and activist investor Ryan Cohen can revitalize the video-game retailer through a digital transformation. For all the whipsawing of the company’s stock price over the past two months, its debt has been relatively stoic, suggesting a rocket-ship-like turnaround is still anything but certain. The bonds last traded on March 5 at 103.5 cents on the dollar to yield 6.34%, or about 620 basis points above comparable Treasuries. That price is actually a bit lower than it was on Jan. 13, when the stock was still trading at about $30 a share.
This would seem to validate some of the skeptics who are scratching their heads at the latest run-up in the stock, which reached as high as $244 on Tuesday. After GameStop announced that Cohen would lead a new committee to help the transition to e-commerce, Wedbush analyst Michael Pachter said that the update was expected and he didn’t “see anything new there at all.” He said the move was due to the stock being a “Reddit Raider favorite.”
It’s a market cliche to say that stocks are about emotion and bonds are about reason. But when a picture of an ice cream cone tweeted by Cohen on Feb. 25 is all that it takes to spark a massive rally, or when a tweet of an apparent screenshot from a Pets.com television ad leads to speculation that it’s a cryptic message about GameStop’s outlook, it’s hard not to agree that’s the case when it comes to GameStop.
That’s not to say Cohen’s bonafides aren’t legitimate — my Bloomberg Opinion colleague Tae Kim made a strong argument last month for how GameStop can succeed with a digitally focused business run by an entrepreneur with a proven track record. But it will almost certainly take at least several quarters for such a transition to happen. That’s just about the same time horizon covered by the company’s bonds.
If GameStop’s outlook is truly as bright as Reddit’s day traders would suggest, there’s ample room for the bonds to rally. The debt is rated B- by S&P Global Ratings and B2 by Moody’s Investors Service, yielding 6.34%. A Bloomberg Barclays index of single-B rated securities, which includes these GameStop bonds and has a longer average maturity of almost six years, yields 4.77%. Such gains would benefit Allianz SE and Toronto-Dominion Bank, which combined own about $63.3 million of the $216 million in outstanding debt, according to publicly available data compiled by Bloomberg.
All this is to say that while #Gamestonk is still doing its thing, it might just be worth watching GameStop’s bonds for a read on the company’s fundamental outlook, devoid of day traders.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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