GME stock analysis: GameStop’s bid for eBay faces a big leverage risk

GameStop stock price will be in the spotlight on Monday as the company makes a leveraged bid for eBay, the e-commerce pioneer. GME stock jumped by over 6% on Friday, reaching its highest point since October last year. Similarly, eBay jumped to $104 from the weekly low of $96 billion.

GameStop makes a leveraged bid for eBay

GameStop, a company valued at $12 billion, has made a $56 bid to buy eBay, a company whose market capitalization jumped to $46 billion on Friday. Its goal will be to buy it in a $56 billion deal, according to Ryan Cohen.

While such a deal is possible to close, there is a possibility that eBay will resist the pursuit because of the involved debt load. Also, eBay’s management will likely prefer a bigger bid than $56 billion.

The most recent results showed that GameStop has one of the best balance sheets in the retail industry. It ended the quarter with over $9 billion in cash and short-term investments and $4 billion in long-term liabilities. 

This means that the company would need to raise over $47 billion in debt to execute the deal. In return, it would receive a company with over $3.6 billion in cash, $750 million in short-term debt, and $6 billion in long-term debt.

eBay’s business has come under pressure in the past few years as more people have opted for Amazon, whose market capitalization has jumped to nearly $3 trillion. 

The most recent results showed that its annual revenue rose to $11.6 billion last year, a slight increase from the $10.6 billion it made in the previous year. Its net income rose slightly to $2 billion. Analysts believe that eBa’s revenue will rise by 10% this year to $12.15 billion, followed by $12.6 billion next year.

GameStop’s business has also deteriorated substantially in the past few years as more customers have opted for digital channels for buying games. Its annual revenue has deteriorated to $3.6 billion from $6 billion in 2021. Analysts believe that the slowdown will continue in the foreseeable future.

Ryan Cohen, the CEO and a big investor, has an incentive to supercharge its performance. Earlier this year, the board agreed to award him billions of dollars if he turns the company into a $100 billion firm that makes $10 billion in adjusted EBITDA a year. Estimates are that he will receive $35 billion if he achieves that.

GameStop stock price technical analysis 

GME stock chart | Source: TradingView 

The daily timeframe chart shows that the GME stock price has been in a recovery path in the past few months. It has jumped from $20 in November last year to $26.5 today. It formed an inverted head-and-shoulders pattern, a common bullish continuation sign in technical analysis.

The stock has  now moved above the important resistance level at $28.8, its highest point on February 2nd. Also, it formed a golden cross pattern on April 20th as the 50-day and 200-day Exponential Moving Averages crossed each other.

Therefore, the most likely scenario is where the stock continues rising as the eBay announcement triggers a short squeeze. If this happens, the next key target to watch will be at $28, its highest point on October 2nd.