GameStop Meets Social Media Investor Mob

When GameStop, the world’s largest video game retailer, started the year less than a month ago, its stock was trading around $19 per share — underscoring the market’s ongoing concern about packaged-media gaming in the digital age.

But that lull has been blown to pieces over the past few days as speculative at-home investors took to social media platform Reddit and began playing up the stock to some of the platform’s 3 million users. In the process, GameStop shares skyrocketed 1,700% to $347 per share, triggering mandatory trading stops by Nasdaq in an attempt to keep the stock, and the market, stable. The stock was up 8,949% (!) over the past 12 months.

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“You combine the power of technology, which allows you … to magnify your individual impact, with some use of leverage and very targeted bets, they can have a significant influence, particularly on areas of vulnerability because of the short positions,”  Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC.

GameStop shares sank early on Jan. 28 as trading platforms including Robinhood and Interactive Brokers restricted trading in the video game retailer. The stock opened at $265 a share and briefly rose to $483 before plummeting to $112. As of 11:45 a.m. EST the stock had rebounded to $225.

The frenzy has defied some Wall Street hedge funds and analysts unaccustomed to seeing day-traders on social media trigger a “short squeeze,” which occurs when a stock skyrockets quickly in value, forcing short sellers (including hedge funds) who had bet that the stock price would fall, to buy again in order to forestall even greater losses. It’s a cruel trading strategy magnified by “mob rule,” with some participants looking for paper wins at the expense of others.

“This is gaining cult-like status,” said Quincy Krosby with Prudential Financial. “It is a pack of traders and the pack is gaining momentum. The retail crowd is not just taking over the shorts and it’s taking over the headlines.”

Indeed, GameStop has been the biggest trending retail market story this week. Longtime video game analyst Michael Pachter contends GameStop is well-positioned to be a primary beneficiary of the new PlayStation and Xbox consoles from Sony and Microsoft, respectively. The video game industry concluded a record 2020 that saw revenue explode to $57 billion, with December sales up 25% due to the new consoles.

“We remain quite optimistic that [GameStop] will return to profitability by fiscal-year 2021,” Pachter wrote optimistically in a Jan. 11 note.

Fast-forward to the present and Pachter shakes his head at the craziness while maintaining a “neutral” rating on the GME stock he values at $19 per share.

“It’s just a feeding frenzy,” Pachter said in a media interview. “There’s nobody in this stock based on fundamentals.”

Indeed, recent fundamentals saw GME worldwide sales results for the nine-week holiday period, ended Jan. 2, increase 4.8% in comparable store sales and 309% in e-commerce sales. But total sales declined 3.1%, driven by an 11% decrease in GameStop’s store base due to a planned “de-densification” strategy, temporary store closures around the world due to pandemic-related government mandates, and lower foot traffic in stores.

“The guys buying [GME shares] at $300 think some greater fool will buy at $400, and so far the greater fools  keep showing up,” Pachter said. “It’s a pyramid scheme.”

Sen. Elizabeth Warren (D-Mass.), a longtime advocate for stricter Wall Street regulations, says the uproar from institutional investors about GameStop trading is disingenuous in the face of the investment industry’s long history of questionable self-dealings and operating counter to actual economic concerns.

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said in a Jan. 27 social media post.

GameStop Stock Skyrockets During Wall Street Debate

Shares of GameStop, the world’s largest video game retailer, shot up 50% in pre-market trading as the company’s stock opened around $90 per share — almost five times higher than 14 days ago. The reason: An ongoing battle between short sellers and investors on the future of retail gaming.

The video game industry just concluded a record 2020 that saw revenue explode to $57 billion, with December sales up 25% due to new game consoles from Sony PlayStation and Microsoft Xbox.

Texas-based GameStop, which has struggled to remain relevant during the ongoing transition to digital gaming, saw operations further threatened during the early days of the pandemic. Then following increased numbers of home-bound consumers due to government-mandated orders to help stop the spread of the coronavirus, business fortunes began to rise.

On Jan. 11, GameStop announced the addition of new board members, including Ryan Cohen, co-founder of Chewy. That move set off a battle of words between short-selling firm Citron Research and speculative buyers organizing on social media. Sales of company shares exploded with more than 194 million shares changing hands on Jan. 22 — up more than eight times the daily average of 23.8 million shares.

In the process, the stock shot up from $2.57 per share on April 3, 2020, to close to $76.76 on Jan. 22, 2021.

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For myriad investors looking to short the stock, i.e. borrowing stock through a broker with hopes to profit from a decline in share prices, the rising stock price wiped out their endgame.

“[GameStop] is a failing mall-based retailer,” Andrew Left, CEO of Citron, said in a YouTube video — adding that anyone buying GameStop shares at elevated prices were “the suckers at this poker game.” Investors kept buying shares anyway.

GameStop earlier in the month reported a 4.8% increase in same-store sales during the nine-week holiday period ended Jan. 2, 2021, and a 309% increase in e-commerce sales.  Total sales declined 3.1%.

“The company won’t execute a turnaround by selling custom gaming PCs or collectibles,” wrote one investor. “This isn’t a deep value stock anymore. It’s a momentum bubble.”

Hedge Fund Looking for Changes at GameStop

After a costly fiscal write-down and sudden departure of the CEO at GameStop – the nation’s largest video game retailer – one major investor has seen enough.

Hedge fund group Tiger Management reportedly send a letter to the GameStop board asking for a strategic review of the company’s business model. The letter comes after shares of GameStop have fallen nearly 50% in the past year.

The company earlier this month reported a pre-announced $106 million fourth-quarter loss after incurring $406.5 million ($311 million after taxes) in asset impairment charges related to third-party (AT&T) mobile phone sales in its technology brands division.

The fiscal debacle followed termination of two senior executives – COO Tony Bartel and Michael Hogan, EVP of strategic business and brand development – seen by some observers as fall guys for the write-down.

Then CEO Michael Mauler, a longtime company executive, on May 11 abruptly announced his resignation just 90 days on the job. His position filled by interim CEO and co-founder Daniel DeMatteo.

“We view the recent management departures and crisis of confidence as an unprecedented opportunity for the board to launch a strategic review and revive shareholder confidence in the sustainability of the GameStop business model,” Tiger Management wrote in the letter, as reported by CNBC.

Specifically, the hedge fund would like GameStop to focus on core business brands, i.e. games; reduce costs and move away from ancillary businesses such as the “technology brands” unit that included the fiscal write-down.

Investor letters to the boards of publicly-traded companies aren’t unusual, and typically act merely as a reminder that investors are paying attention. Tiger said it had no intention of becoming an “activist” investor, but that if changes aren’t made, it would take its toys to another sandbox.

“To the extent that you fail to implement a turnaround plan, we merely intend to sell our shares and redeploy capital toward more attractive investment opportunities,” wrote Tiger.

The letter did cause a slight (1.9%) bump in GameStop shares in early morning trading. The company reports fiscal results later this month.