Background
GameStop is an American video game retailer that operates over 5,000 stores across the US, Canada, Australia, New Zealand, and Europe. The company has been struggling in recent years due to the rise of digital distribution platforms, such as Steam and Epic Games Store, and the impact of the COVID-19 pandemic on its physical sales. As a result, GameStop’s stock price (NYSE: GME) has been declining steadily, reaching a low of $2.57 in April 2020.
Many hedge funds and institutional investors saw an opportunity to profit from GameStop’s downfall by short selling its stock. Short selling is a practice where an investor borrows a stock from a broker and sells it in the market, hoping to buy it back later at a lower price and return it to the lender, pocketing the difference. However, short selling also involves a risk: if the stock price goes up instead of down, the investor has to buy it back at a higher price and incur a loss.
One of the most prominent short sellers of GameStop was Melvin Capital, a hedge fund founded by Gabe Plotkin, a former star trader at SAC Capital. Melvin Capital reportedly had a short position of $55 million on GameStop as of December 2020, betting that its stock price would continue to drop.
Online Discussion
However, not everyone agreed with Melvin Capital’s bearish view on GameStop. A group of retail investors, mostly young and tech-savvy individuals, started to rally behind GameStop on an online forum called r/wallstreetbets, a subreddit on the social media platform Reddit. r/wallstreetbets is a community where users share their opinions, strategies, and experiences on trading stocks, options, futures, and cryptocurrencies. The subreddit is known for its irreverent and humorous tone, as well as its penchant for taking risky and speculative bets on volatile and unpopular stocks.
One of the most influential users on r/wallstreetbets was Keith Gill, also known as u/DeepFuckingValue or Roaring Kitty on YouTube. Gill is a former financial analyst who started investing in GameStop in 2019, when its stock price was around $5. He believed that GameStop had a strong brand recognition, loyal customer base, and potential for growth in the e-commerce and digital gaming sectors. He also saw that GameStop was heavily shorted by hedge funds, which he considered as an opportunity to trigger a short squeeze.
A short squeeze is a phenomenon where a sharp increase in the demand for a stock forces the short sellers to buy it back to cover their losses, creating a positive feedback loop that drives the price even higher. Gill posted his analysis and updates on his GameStop position on r/wallstreetbets regularly, attracting thousands of followers and supporters who shared his bullish sentiment.
Timeline
Rise in Stock Price and Volume
The online campaign to boost GameStop’s stock price gained momentum in January 2021, when several factors contributed to its surge. First, GameStop announced that it had added three new directors to its board, including Ryan Cohen, the co-founder of Chewy.com, an online pet retailer that was acquired by PetSmart for $3.35 billion in 2017. Cohen had invested in GameStop in 2020 and had been pushing for a digital transformation of the company. His appointment was seen as a sign of confidence and optimism by many investors.
Second, GameStop reported better-than-expected sales for the holiday season, thanks to the launch of new gaming consoles from Sony and Microsoft. The company also announced that it had paid off its long-term debt and improved its cash position. These news boosted GameStop’s earnings outlook and reduced its bankruptcy risk.
Third, several celebrities and influencers endorsed GameStop on social media, such as Elon Musk, Chamath Palihapatiya, Mark Cuban, Ja Rule, and Jon Stewart. Their tweets and posts generated more attention and interest in GameStop among the general public.
As more and more people joined the bandwagon to buy GameStop shares and options, the stock price skyrocketed from $17.25 on January 4 to $347.51 on January 27, an increase of nearly 2,000%. The trading volume also exploded from 6 million shares on January 4 to 197 million shares on January 27, exceeding the total number of shares outstanding (69 million) by almost three times.
Halting of Stock Purchases
The meteoric rise of GameStop’s stock price caught many hedge funds and brokers off guard. Melvin Capital reportedly lost 53% of its value in January due to its short bets on GameStop and other stocks. The hedge fund had to receive a $2.75 billion bailout from Citadel and Point72, two other hedge funds with ties to its founder.
On the other hand, many retail investors who bought GameStop shares and options through online platforms, such as Robinhood, Webull, TD Ameritrade, and E-Trade, faced difficulties and restrictions in executing their trades. On January 28, these platforms announced that they had temporarily halted or limited the buying of GameStop and other securities, citing increased market volatility and regulatory requirements. However, they still allowed the selling of these securities, which created a downward pressure on the prices.
Many users of r/wallstreetbets and other platforms accused the brokers of market manipulation and collusion with the hedge funds. They argued that the brokers were trying to protect the interests of the short sellers at the expense of the retail investors. They also claimed that the brokers violated their contractual obligations and fiduciary duties by restricting their trading rights. Some users even filed lawsuits against the brokers, alleging fraud, breach of contract, and negligence.
Decline in Value
The halting of stock purchases had a significant impact on GameStop’s stock price, which plunged from $469 on January 28 to $193.60 on January 29, a drop of nearly 60%. The stock price continued to fluctuate in the following days, reaching a low of $51.10 on February 4, a decline of over 90% from its peak.
Many retail investors who bought GameStop shares and options at high prices suffered heavy losses. Some of them sold their positions to cut their losses, while others held on to their shares, hoping for a rebound. Some users of r/wallstreetbets encouraged each other to keep buying and holding GameStop shares, using slogans such as “diamond hands” and “to the moon”. They also expressed their disdain for the hedge funds and the brokers, using terms such as “paper hands” and “suits”.
Resurgence from February 24
GameStop’s stock price experienced a resurgence from February 24, when it jumped from $44.97 to $91.71, an increase of over 100%. The stock price continued to rise in the following days, reaching $325 on March 10, an increase of over 600% from its low point.
The reasons for the resurgence are not clear, but some possible factors include:
- A congressional hearing on February 18, where the CEOs of Robinhood, Citadel, Melvin Capital, and Reddit testified about the GameStop saga. The hearing generated more publicity and interest in GameStop among the public.
- A tweet from Ryan Cohen on February 24, showing a picture of a McDonald’s ice cream cone with a frog emoji. The tweet was interpreted by some investors as a cryptic message or a signal for buying GameStop shares.
- A report from Chewy.com on March 9, showing strong earnings and revenue growth for the fourth quarter of 2020. The report boosted the confidence and optimism of GameStop investors who saw Cohen as a key figure in turning around the company.
- A filing from GameStop on March 9, announcing that it had appointed Jenna Owens as its new chief operating officer. Owens is a former executive at Amazon and Google, and her appointment was seen as another step in GameStop’s digital transformation.
Impact on Involved Entities
The GameStop saga had a significant impact on various entities involved in the stock market, such as:
Losses by Short Sellers
The short sellers of GameStop suffered huge losses due to the short squeeze. According to S3 Partners, a financial data firm, the short sellers lost more than $12 billion in January alone. Some of the most affected hedge funds include:
- Melvin Capital: The hedge fund lost 53% of its value in January due to its short bets on GameStop and other stocks. The hedge fund had to receive a $2.75 billion bailout from Citadel and Point72. The hedge fund also reduced its short position on GameStop by more than half in January.
- Citron Research: The research firm run by Andrew Left, a notorious short seller, lost more than $100 million due to its short position on GameStop. The firm also faced online harassment and cyberattacks from some supporters of GameStop. The firm announced that it would stop publishing short-selling research and focus on long opportunities instead.
- Maplelane Capital: The hedge fund lost 45% of its value in January due to its short bets on GameStop and other stocks. The hedge fund also reduced its short position on GameStop by more than half in January.
conclusion :
GameStop is an American video game retailer that operates over 5,000 stores across the US, Canada, Australia, New Zealand, and Europe. The company has been struggling in recent years due to the rise of digital distribution platforms, such as Steam and Epic Games Store, and the impact of the COVID-19 pandemic on its physical sales. As a result, GameStop’s stock price (NYSE: GME) has been declining steadily, reaching a low of $2.57 in April 2020.
