What happened with GameStop (GME)?

Share price of GameStop (GME) is on the rise again, surging more than 100% on 24 February.

GameStop ended the day at a valuation of $91.71, as investors poured into the brick-and-mortar retailer amid a C-suite resignation. 

GameStop announced on 23 February that Jim Bell, its chief financial officer, will resign on March 26.gamestop-logo


It’s the highest GameStop stock has been since its fall at the beginning of February following the Reddit army that sent it as high as $483 a share.

The stock market is known for being unpredictable and volatile, and any sense of normalcy was blown up during the recent GameStop situation. Analysts said the clash between Wall Street experts and retail traders that sparked roller coaster rides in GameStop Corp shares might cause a threat to other stocks and potentially create a headache for the broader market. Nobody in 2020 would have expected that GameStop, an American video game, consumer electronics and gaming merchandise retailer, would become one of the top news stories of the month around the world.

GameStop store

 

But it happened. The Company’s share price rose as much as 2,000% within a couple of weeks after Reddit users decided to make a point to Wall Street and show that people’s influence is greater than ever. As small investors championed their purchases of the retailer’s stock in viral posts online, the company’s share price grew dramatically, causing a group of Wall Street Hedge Funds to spend billions of dollars to cover their losses.


What happened to GameStop in January?

With the increasing shift to e-commerce, the company's profitability has been on the decline and the stock was subject to heavy short selling by Wall Street's multi-billion dollar hedge funds. Short selling is a fairly simple concept—an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are betting that the stock they sell will drop in price. If the stock does drop after selling, the short seller buys it back at a lower price and returns it to the lender. The difference between the selling price and the buying price is the profit.

After information about the short had been leaked, users of a Reddit group called "WallStreetBets" (which has over 5.7 million members) frenetically bought GameStop shares like there was no tomorrow, driving its price "to the moon". It’s unclear exactly how much cash has been lost by these Hedge Funds because of this, but NYC Based Melvin Capital took a US$2.6Bn bailout from billionaire investors, Steve Cohen and Ken Griffin, in exchange for non-controlling revenue shares.

GameStop was valued at 400 million USD in 2020 and Redditors managed to drive that up to 10 billion USD within six months.


Does this mean anything for the future?


wallstreet protest

In the long term, Wall Street and the broader market state abide by the rule that “the fundamentals” always win out. This means a stock’s price eventually settles where it should, based on its intrinsic value and its economic and financial factors. The recent plummet back to earth for GameStop’s stock may be proof of that.

What GameStop did, though, was show how a group of retail investors banding together can dramatically push up the price of a stock in the short term. Many market watchers believe hedge funds and other professionals also played a role in GameStop’s surge, but they were likely only accelerating the spurt sparked by retail investors.

Looking forward, retail investors could be the ones doing the squeezing. Collectively, they account for 20 per cent of all trading volume, said Pauline Bell, Analyst at CFRA Research. That’s up from 10 per cent to 15 per cent during 2019 and most of 2020.

Lori Calvasina, head of US equity strategy at RBC Capital Markets, wrote in a recent report.“We believe a structural change may be afoot and that retail investors are likely to remain bigger players in the US equity market going forward.” 

 

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