By Alisha Tan
GameStop Corporation (NYSE: GME) is an American video game retailer and trade-in destination. Since the end of January, shares of GameStop have been rapidly rising and falling. At its peak, the GameStop share price rose to around $US350, from about $US20 in early January. In the span of one week, it went up almost tenfold. The story of GameStop is an extremely fascinating one, as it shows just how much of an impact social media can have on the financial system in this day and age. The fact that the entire saga started with a single subreddit community, r/WallStreetBets, is mind-boggling.
The story of GameStop
Given GameStop is a brick-and-mortar game store and the growing prevalence of digital game purchases, over the years its share price has fallen to as low as $US4. Many major investors believed that GameStop would eventually go bankrupt due to the state of the gaming industry.
However, a man named Keith Gill begged to differ. Gill undertook thorough research into the company and its financials, and believed that the stock was indeed undervalued for a number of reasons, such as:
- Billionaire investor Ryan Cohen, founder of Chewy, owned about 13% of GameStop stock, and was appointed to the Board of Directors in January 2021. As Cohen has strong experience in running e-commerce companies, Gill believed that the company could recover from its low share price with good management and adaptive change.
- In November 2020, the PS5 and Xbox Series X gaming consoles were being released. This would boost GameStop’s sales and drive up its share price.
- The demand for physical games was in fact still higher than most people thought.
He shared his findings and analysis on the subreddit r/WallStreetBets and on his Youtube channel, Roaring Kitty, and invested $US53,000 in GameStop in September. Many other members of the Reddit community agreed that the stock was undervalued.
Something Redditors realised was the fact that 84% of GameStop’s stock were held as short positions, which was highly unusual.
Short selling is a strategy which entails an investor borrowing shares of a stock and selling the shares to another purchaser, and then buying the stock at a later stage to return to the original lender. As the investor is borrowing the stock, they will also need to pay interest to the lender. An investor who short sells intends to make a profit from a drop in the share price, as they hope to buy the stock at a lower price than they had sold it for. However, if the share price increases instead, their losses could potentially be limitless.
So, as more Redditors came to know of GameStop, they began to hatch a plan. The plan was to attack hedge funds and institutional investors by buying and holding GameStop stock. They did so by purchasing GameStop shares to raise the share price. As hedge funds primarily held short positions in GameStop, they responded to the rising price by trying to quickly cover their losses and buying shares to return to the lenders. As there were more short positions than actual shares available and hedge funds were scrambling to buy shares, there was a large increase in the demand but only limited supply, which drove share prices up even more. This phenomenon is called a short squeeze.
WallStreetBets versus Wall Street Hedge Funds
Redditors tried to drive the price up as much as possible to cause hedge funds to lose more and more money. Hedge funds lost money from purchasing the stock at a higher price than that which they sold at, and also from the short interest they had to pay the lender. One particular hedge fund, Melvin Capital, lost 53% of its fund in January, and had to be bailed out by other institutions, such as Citadel, which invested $US2.75 billion into Melvin Capital.
Redditors were banding together and protesting against institutional investors, as demonstrated by a Reddit post titled ‘Bankrupting Institutional Investors for Dummies, ft GameStop’. There were a number of Reddit posts after the price soared encouraging others to hold their stock, and even billboards in the US joining in on the movement. The plan was to do as much damage to hedge funds as possible. At the height of the stock rally, Gill’s $US53,000 turned into $US48 million worth of GameStop shares. Some small traders were able to pay back their student loans. Large investors and funds also joined the Redditors investing in GameStop, and nine investors instantly made $US16 billion collectively on the squeeze.
While the number of people supporting the movement was growing, others began to take action against it. Discord, an online messaging platform, banned the r/WallStreetBets server for ‘allowing hate speech’. The trading and investing app Robinhood banned retail investors from buying GameStop and other highly shorted stocks that were being targeted, such as AMC and BlackBerry; only selling was allowed. This incited rage and controversy in the public – many believed it was a form of market manipulation that would force the price down.
Amid the squeeze, GameStop had an intra-day peak of $US483 on January 28. However, the price eventually declined 90%, falling to around $US50 in mid-February. In late February, Gill doubled his stake in GameStop from 50,000 shares to 100,000 shares, demonstrating his bullish position on the stock. It then unexplainably surged 18% on February 26 and is currently sitting at around $US130. Gill’s current stake is worth about $US5.5 million.
There are also much larger implications for the wider market as the idea of targeting shorted stocks has spread throughout the world. Investors are now trying to duplicate the short squeeze with other stocks – for example, Webjet, the most shorted stock on the ASX, went up 10% in February. There are also many potential regulatory implications that may result from this event, though there are no new regulations so far.
We have yet to see the end, but the story of GameStop demonstrates just how volatile stocks can be and will undoubtedly go down in history.
Sources: AFR, MarketWatch, The Motley Fool, Quartz, Business Insider, BBC, YouTube, Reddit, Yahoo Finance, Business Insider, Small Caps
The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.