GameStop: When Will the Game Stop?

GameStop is an American high street shop that sells games, consoles and other electronics. GameStop wasn’t exactly thriving. With fewer people out shopping due to the pandemic and most games being sold online, things weren’t looking great for the company. GameStop began to struggle a decade ago.

In the nine months through the end of October, its most recent reporting date, GameStop had revenue of nearly $3 billion, 31 percent lower than in the same period a year earlier. Because of cost reductions, its loss of $296 million was smaller than the $492 million in the equivalent period of 2019. Wall Street analysts, on average, don’t expect the company to become profitable until its fiscal year that ends January 2023, when they think it will earn a profit of $1.12 per share. GameStop’s stock trades are at over 200 times those estimated profits. The equivalent valuation for Walmart is far cheaper at 23 times.

Some people bet on companies that they think will not do well in the future. They borrow shares in a company and sell them, with a promise to buy them back later. If the company losses value in the future, they will make a profit when they buy them back at a lower price. This was what happened to GameStop before retail investors got involved.

GameStop was one of the companies that hedge funds had bet on to lose a lot of value. But several retail investors from the WallStreetBets Reddit forum decided to punish those betting against it by buying the shares in GameStop. The demand raised its share price massively, from $4 last year to its peak at $483, and thus the hedge fund short position started to lose billions.

The companies that operate the small investors' accounts have started shutting down the activity before the regulators step in. They say they are trying to protect the little guy who sees something going up and wants a piece of the action to make a few bucks.

The army of small investors cry foul: you are limiting my freedom - it's my money to do what I want with. Simon Jack pointed on BBC (1 Feb 2021) that this suddenly becomes a political debate. My freedom to trade is the financial equivalent of my freedom of speech and the powers that be are silencing me.

Investors who are involved in this game come with different motives. Some may have hoped to profit from getting in early and starting a wave, ride it for a bit before getting off the wave and letting it crash after they've taken their profits. Others see something going up and think the sky's the limit to this - still plenty of time for me to profit too. And still others think - I don't really care if I lose a few bucks, sticking it to the man is the name of the game.

What’s going on now?

Chart: Apple Stocks

 

When the market closed on 2 Feb 2020, the price of GameStop was $90 even, a massive drop from GameStop’s peak at $483. The tumble in GameStop’s shares indicates that the hedge funds were betting against it and were caught in a “short squeeze” – a situation where they have been forced to buy more shares in a bid to stem their losses. They have now closed out their positions.

Belfort, an author and motivational speaker, told the BBC that the Reddit investors who had poured their cash into unfashionable stocks which Wall St professionals were betting against should be careful: “If you are looking at this as a way to make your living, you’ll have to catch a falling knife on the way down. I would urge people to take their chips off the table.”

He added: “Be aware of being the last person on the bandwagon, that is really the danger here.”

I am no fan of hedge funds – they are “vultures” waiting for a kill. So, it must have come as a shock to them that retail investors played their game – and some won! Now the vultures are crying foul! What will the authorities do? Most likely support the hedge funds because they are the market makers and all the rest of the BS!

The important thing to remember is if you are “small” be prepared to lose because the big “boys” have more information than you. There is no such thing as a free or perfect market, that exists only in academia or in Economics 101.

 

So, for GameStop the end maybe very soon!

 

Disclaimer

We are not recommending any counter or share nor accept any liability or loss for the stock mentioned above.

 

References:

1.     GameStop: What is it and why is it trending? 29 Jan 2021, BBC

2.     GameStop - David and Goliath or a political fable? 1 Feb 2021, BBC

3.     GameStop shares plunge as traders dump stock, 2 Feb 2021, The Guardian

4.     GameStop: What is it and why is it trending? Kirsty Grant, BBC

5.     What is GameStop, the company, really worth? Does it matter? Peter Davis, 1 Feb 2021,  New York Times