The Price/Value Feedback Loop: Revisiting AMC and GME!

Value is driven by business models and fundamentals. Price is driven by mood and momentum. IN reasonably efficient market, they should converge, but what if they diverge? In this session, I look at how the price diverging from value (in either direction) can have a feedback effect on value. When a company's stock price soars past its value, the company benefits not just from perception, but also from fundamental changes that can occur to its business. Those changes can range from conversion of debt into equity and better employee retention (implicit) to new stock issuances at the higher price, to take advantage of the mis-pricing. Conversely, if a company's stock price drops below value, that not only negatively alters perception about the company, but it has fundamental consequences, increasing the debt load as a percent of value, and prompting employees to look for better places to work. For this company, buybacks can increase the value per share of the remaining shareholders. In this session, I look at the possibilities in both cases, and natural constraints on why they may not always deliver the results you expect them to deliver.

[djwigglz]

"your eyes are already rolling" As I'm sitting forward in my chair with wide eyes, open mouth, and pen and paper ready to write....

[jarroyox]

Never tired of hearing your insights, professor! Thank you and keep 'em coming!

[ValueInvestorsArchive]

The voice of reason in current market situations

[danjuhl]

Thanks for the generally world class content here and on your blog. I cannot thank you enough. It is so valuable when someone like you, knowledgeable and with great teaching skills, unselfishly provides the world with amazing content. Thank you.

[michaelpark]

This man has always been so humble and yet does the incredible job of making finance enjoyable for all

[MoneyWiseSmart]

Professor, thanks for the very great post which is very apt at these times for people to learn using actual case studies.

We from MoneyWiseSmart advocate investment education and many of our members follow your content closely too. We have a few comments just on GameStop's situation, which we have had the luxury of time (as this is what we do full time, and that we have nothing better to do) to slowly pore through the many SEC filings to understand what happened to them specifically on their intention/ ability to issue new shares considering the reality checks (often overlooked by people) you have beautifully outlined.

1. Generally, as you mentioned, companies raise new public equity through primary or initial public offering (IPO), and then secondary offering. In certain instances, albeit not as popular or publicised, companies can raise new public equity through at the market (ATM) offerings too. For ATM offering, companies would engage a sales agent/ broker to issue new shares and sell into the market at market prices over a specified short period (maybe weeks or months, as it's costly to keep the program running due to the sales agents' appetite for their own pocket). ATM offerings have the advantage of being simpler (no road shows, lots of filings and parties involved, etc) and quick (e.g. if the companies foresee liquidity issues in the near term). However, they are usually used for smaller sized offerings, as it's difficult to not move the price if large amounts are issued depending on the trading liquidity of the stock.

2. On GameStop, this is the path they chose (for reasons we probably won't be able to know exactly, but that doesn't really matter). On December 8, 2020, GameStop issued its quarterly results. In that filing, they stated their intention to do a ATM offering. In particular, they stated "As part of its strategies to create optimal financial flexibility and expand liquidity alternatives, the Company intends to file a shelf registration and prospectus supplement with the Securities and Exchange Commission today under which it may offer and sell, from time to time, shares of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, would be used for working capital and general corporate purposes, which may include funding of the Company’s ongoing digital-first omni-channel growth strategy and expansion of its product and services offering. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company".


3. Having announced their intentions are definitely not enough, as there are regulatory requirements to do so, i.e. the Form S3. On the same day, they filed their S3 with SEC. That form states that "We may offer and sell, from time to time, one or any combination of the securities we describe in this prospectus". The securities referred to include Class A Common Stock, Preferred Stock, Depositary Shares, Warrants, etc. The form does not state the maximum number of shares that can be issued, but it reinstates an already known fact that they had 300 million authorised common shares (and 5 million authorised preferred shares), much greater than their outstanding 70 million common shares as at December 1, 2020.


4. On the same date (December 8, 2020), GameStop also filed another filing, announcing its entering into an Open Market Sales Agreement with Jefferies as the Sales Agent. Under that agreement, they can issue up to USD 100 million worth of Class A common stock, with the issuance floor price of USD 1.00 per share (without Jefferies having to seek further consent from the company). The company is only legally obliged to report updates on this quarterly, so we should expect to see something in the next quarterly earnings. In the mean time, we are of the opinion that it is very likely that the company should have already commence offering new shares into the market, as given that at such high share prices, it could be a breach of fiduciary duties for the Board of Directors to not push for a share issuance, particularly if they don't and later on the company faces liquidity issues and goes under (i.e. a very bad outcome for the existing shareholders, when something easy could have been done to salvage that situation).


5. Thus far the company has not filed with SEC any updates on any similar Open Market Sales Agreement with the other sales agents, or other types of financing (e.g. private placements, etc). Therefore, it could be that as of now, they can only issue up to USD 100 million worth of new shares. It's unclear if they are obligated to, given they have already filed the main document, i.e. the Form S3. We had dropped the company an email to clarify on this early on, but to no surprise we heard nothing. However, it would be strange to not increase the limit given the favourable situation now, including the massive trading volumes that are generally the limiting factor for companies to raise large sums of money through ATM offering, but in this case all the stars are aligned for GameStop to raise so successfully. However, we are not in the game to make speculations, and we don't think we are good at it too.

So these are our two cents, specifically on the GameStop's situation, for your kind consideration. We would very much appreciate any thoughts or comments from you (or the others) on this issue, given your immense experience in this field, so that everyone can learn from this rare episode that comes once in a while in our lifetime!

Many thanks!
MoneyWiseSmart team

[brokuhackson]

I would never be sick of hearing your thoughts on anything!

[shekharsuman]

It's so captivating to listen to such insightful thoughts. And it is all very true and practical

[furyp]

thank you for the clarifications around share issuance! it's always not as simple as it seems.

[pixphys]

Glad you got a nice microphone. Much easier to listen to without the room echo. Thanks.

[curteilers]

This is wonderful, thank you! My hope was that GME would convert the short interest into value (basically ending up with a similar number of new shares but a reduced number of synthetic shares because the rising floor of the stock price from the capital raise would push them to cover), but after reading many SEC filings it became clear that the company was not prepared for this.

[ashsailor]

I am totally agree with you, The best way is to do not invest on head funds. the are useless and their performance is showing that.
Thanks for insights, You did add value to me.

[re]

Brilliant video. Thank you for such a clear explanation

[mariof]

Amazing explanation! Thanks, Professor!

[valentinbrescan]

Very insightful video. The behaviour of lenders and employees given as examples at the beginning seems irrational if you expect the share price to trend back towards the fundamental value over the long term. They should add a chapter in the CFA curriculum with examples for stakeholder biases when price diverts materially from value

[kirillsamoroukov]

Thank you very much, Professor! TRIUM 2011 here with regards. I entered AMC in December after they announced the issuance you mentioned in the video, increased it after the bad news regarding covid restrictions and streaming services and 10x-ed it when the stock price started moving. It would be great if you could share your take on the current value of AMC just like you did with GME. As to the hedge funds, I would like to add that they most likely made their losses back by shorting the stock again from its highs

[macleanandrades]

Thanks for another very informative video!

[jamesstmanhattan]

Professor, are you gonna upload the second lectures of the Corporate Finance and Valuation classes today?

[benjaminwen]

Thank you Prof. I hope I can learn more from you.

[jamesstmanhattan]

Professor, are you gonna update your Investment Philosophies course as well? I'd love to re-watch it, furthermore you might wanna add something new to it do to the Covid crisis and the shift in the investment paradigm, namely the increase in the popularity of ESG both in America and in the EU and the low interest rate world in which bonds yield next to nothing.