In late January, millions of rogue investors banded together on a Reddit forum and pumped a dying stock to dazzling heights by short-squeezing Wall Street hedge funds. GameStop, an American brick-and-mortar retailer for video games and all things gaming merchandise, was thought to be done for -- but the attention it received has revitalized the struggling company's prospects.
Just a year ago, the stock was trading in the $3 range from just below $50 in 2014. Then Reddit's WallStreetBets gang identified a stupidly high amount of shorting activity -- in other words, many investors were betting on the stocks fall. Some of the Reddit community's more savvy members hatched a plan to buy and hold GameStop (GME) stock in order to drive its price up by triggering what's known as a short squeeze -- stock borrowed by hedge funds who made a bet the price will fall would have to be bought by them at much higher prices, thereby inflicting enormous losses on them while returning massive gains to the stockholders.
On January 20, Gamestop's price rose to almost $40 per share -- that's double the price from only three weeks earlier. Five days later, it surged to $78. By January 28th, the price reached a staggering $483, a sweet 2,415% average return for those who jumped early on the bandwagon.
Hedge funds were less enthused, encurring losses of about $20 billion.
Bearing all of this in mind, you can easily understand why the internet went nuts over what might very well be the financial story of the decade. It's got all the elements of an enthralling plotline, not entirely dissimilar to "David Beats Goliath" or "Robin Hood".
But by late February, the $GME stock deflated to a measly $40. Was this the end of the saga? Not nearly.
According to data from S&P Global Market Intelligence, GME shareholders gained 87% in March, as the stock bounced back formidably.
Obviously, GME is still a highly speculative and risky investment. However, this high degree of attention has also fueled fundamental change in the company.
GameStop is currently on a hiring spree, having nabbed a formed Amazon executive last week, right on the heels of the previous hiring of two alums of Chewy. In January, the company announced that Chewy co-founder Ryan Cohen and two associates were joining the company’s board.
While GME's parabolic rise in stock price was driven by excessive hubris on the part of hedge funds, abnormal options activity, and a day trading frenzy, this short-squeeze may have ignited a genuine transformation of the company.
GameStop’s positioning as a physical retailer at a time when the pandemic has accelerated a shift toward direct digital downloads on consoles had hammered GameStop stock in the first half of 2020. But now with the GME stock frenzy, the company's e-commerce sales have surged. The company has also introduced new purchasing options such as curbside pick-up.
So this GameStop saga may not be all about taking from the rich and giving to the poor. GameStop's story could very well morph into one akin to that of the phoenix rising from its ashes. Meanwhile, it's safe to say GME's volatility will continue until the company's fundamentals catch up with investors' enthusiasm.
