27 January 2021

Wired: “A Fight over GameStop’s Soaring Stock turns Ugly”

Like other physical retailers, GameStop’s business has suffered in the past year. Few gamers would rather hit the mall than Amazon’s significantly safer Buy Now button. But GameStop was in dire straits even before the pandemic struck. Its thousands of store locations couldn’t compete with the digital marketplaces offered by the game consoles and PC titans Steam and Epic Games. GameStop laid off dozens of regional managers in mid-2019 after a precipitous, years-long decline in its stock price. To remedy the situation, GameStop announced it would pivot to a social-hub model, like a modern LAN cafe. Then the pandemic hit.

So-called retail investors—individuals rather than institutions—began sniffing around, especially those orbiting the hugely popular subreddit WallStreetBets, which has 2 million members and describes itself as “like 4chan found a Bloomberg terminal”. As a collective, the subreddit has previously amassed enough bodies and enough funds to drive unlikely rallies in the stocks of companies like Lumber Liquidators and Plug Power. It was a meme stock that really blew up, said WallStreetBets moderator Bawse1. The massive short contributed more toward the meme stock. GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock.

Cecilia D'Anastasio

The result? GameStop’s stock price went up from $20 on January 11 to almost $150 as of today! A similar rally is probably behind Tesla’s record high valuation.

GameStop GME 6 months stock price evolution

Tensions between retail investors like WallStreetBets and a traditional short seller like Citron Research have threatened to boil over for some time, in part because of a core philosophical difference. The traditional Wall Street view is that markets are driven by some tie to fundamental value, said Hoffstein. What we’re seeing is an influx of speculative retail traders who don’t have any philosophy about valuation. He quotes a phrase from Bloomberg’s Tracy Alloway: “Flows before pros”. The market will be driven by a flow of capital rather than fundamentals—not a novel quandary considering 1999’s dotcom bubble. (Then, too, day traders would often pile into a stock on the rise, assuming it would always go up.)

I think the subreddit brings a new factor into stocks that wasn’t as prevalent as before, says Bawse1. It’s called hype.

It feels like the more I learn about how the stock market works, the less I understand it, but this huge volatility with no economic basis cannot be healthy for the economy. I wonder how ‘funny’ things will seem for these people when this particular stock will crash…

But the tug-of-war between professionals betting that Gamestop is not worth its inflated price, and that it will fall, is not over. Short interest remains high. So, even if some pro investors have cried uncle and exited their trade, the retail revenge on the so-called smart money is hardly a sure thing; what those excitable individuals may have done is merely set up a more enticing short position for hedge funds than had existed before.

Gamestop has a lot further to fall from over $140 per share than it did from $18, say.

Alex Wilhelm

Post a Comment