Gamestonk!!
A one-word tweet from Elon Musk on January 27th added fuel to the fire of a rising stock leading to an unheard of 1600% spike in the share price of GameStop Corp. This has brought upon us an era of broken fundamentals in the market and glorious memes along with it.
Background
GameStop is a video game retailer (Remember when game discs were purchased from malls, like years ago? )The coronavirus pandemic hit GameStop hard, surprise surprise. Like many retailers, already suffering from the shift to online sales, the video games chain was losing money and planning to close 450 stores. And yet, surprisingly, GameStop has become one the hottest stocks of the year.
The 37-year-old chain store group is now the focus of a David-and-Goliath battle between an army of small investors and Wall Street that shows no signs of abating and has highlighted some fundamental shifts in investing.
Last April, when the company announced mass closures, GameStop’s shares could be bought for $3.25 each. On Tuesday they soared to $347 pumped up again by small investors hoping to ruin Wall Street bets that the price would crash.
The strange saga of GameStop’s cult status can be traced back to last September, when Ryan Cohen — investor and founder of the online pet food giant Chewy — took a 13% stake in the retailer and started lobbying to move more of its business online and become a serious rival to Amazon.
The Perfect Storm
Understanding this unheard of surge is quite straightforward. It’s the Revenge of the Retail Trader squeezing large hedge funds that had bet against the video game retailer and other unfavourable stocks such as Blackberry and AMC Entertainments (movie theatre chain). The ingredients for this perfect storm were are as follows:
- Savings were boosted due to lockdowns and stimulus cheques and low interest rates as well as free mobile apps for trading like Robinhood drove a younger generation to try out the stock market joyride.
2. Conventional wisdom such as fundamental analytics and valuation metrics have been thrown out of the window, as this fraternity-type feeling of fighting against the established order has led to a large surge in stocks typically shorted by hedge funds such as Evotec (rallied 8%) by individual retail investors grouping together in the groups such as wallstreetbets on Reddit and Discord.
3. The battle has become a war of attrition between a new generation of investors and established, more diversified players
4. The Reddit crowd realized that if they could create artificial demand for GameStop shares with their own money, they could force Wall Street to recalibrate its bets, pushing prices even higher. And some investors who couldn’t even back up their bets against GameStop, would have to pay even more. They also realized that GameStop was shorted by more than 100%. That means that investors had bet more shares than existed in the company that it would lose value.
5. Then came the big bet: If big investors had bet more shares than GameStop had in existence that it would lose value, what would happen if lots of individuals investors — retail interest, as they say — started buying the stock? That might drive its value up, forcing the hedge funds and other big capital pools to decide whether to hold onto their negative bet and take strong paper losses as GameStop rallied, or cover their short, buying the stock at a higher price than they initially paid for it, losing money. Covering shorts would require buying the stock at high prices, perhaps boosting its value yet again.
6. But a boom in retail investing and social platforms allowing the congregation of disparate individual investors can do quite a lot, it turns out. So, users of the WallStreetBets sub-Reddit started buying GameStop. And they kept doing so, pushing its price higher and higher. Retail is generally said to be mad at being pushed around and generally speaking operating as second-class investing citizens. The GameStop gambit is, to some degree, revenge.
7. Not that it will matter in the long-term. Large investing groups will still crush retail, having access to better information and tools and the like, as we mentioned up top. But today, at least, those same concerns are going to start the day with huge paper losses on their GameStop shorts.
8. Short sellers such Melvin Capital and Citron Research are the arch-nemesis in this movement. Short sellers who bet that stock prices would fall are now forced to scramble and cover these short positions to prevent further losses, but paying inflated prices is adding further fuel to the fire. This phenomena called the short-squeeze is also drawing in more retail investors hoping to drive the wave. Short sellers in GameStop are down $5 billion on a mark-to-market, net-of-financing basis in 2021 and there are already rumors of bankruptcy filings floating about.
The Salt
- The major win for the retail investors is the incredibly bitter reaction of the elite hedge funds as they were forced to close out their short positions taking billions in losses. Short seller Andrew Left of Citron Research said Wednesday he has covered the majority of his short position in GameStop at a loss. He previously said GameStop will fall back to $20 a share “fast” and called out attacks from the “angry mob” that owns the stock.
2. GameStop has been the most actively traded stock by customers in recent sessions, with buy orders outnumbering sell orders by more than four to one. The volatility prompted the New York stock exchange to briefly halt trading nine times.
3. The White House has said it is “monitoring” the extraordinary surge in the share price of GameStop and other companies amid a surge of bets by small investors discussing their investments online.
However there is always AOC
The End Game
How will this end? Definitely bad for a majority, as just like any Ponzi scheme eventually the money will run out and the losses on the bottom will pay for the gains on the top. Let us not forget — GameStop is a Video Game Retailer. When was the last time anyone bought a video game offline? GameStop revenue has been plunging over the last two years from $8.3B to $5B with rapidly increasing losses. The average price target provided by several analysists track the stock is $11.01 (down 97% from current stock price of $347).
The establishment has also struck back, the WallStreetBets Discord Server has been shut down.
However, the GameStop board must surely now considering an issue of new shares at or below its new, lofty share price that would deal with several problems at once — getting rid of a lot of debt, using the amazing appetite for its shares to its advantage and setting the company up for a more profitable future.
Longer term, it is interesting to consider what might happen to the newly enriched and excited Reddit nerds, who are already buying stock in other heavily shorted companies to run sequels to their GameStop short squeeze. Till then..
