Retail chains across the world have been hit hard by the Coronavirus pandemic. GameStop, the decades old retailer of video games, was one of the casualties. In 2020, the once great giant in the video game retail industry announced massive losses and plans of closing down multiple stores by 2021. However, no one could have predicted it would become the central figure in a virtual battleground between an army of small investors and Wall Street financiers who attempted to pull a "short" in GameSpot’s expense.
The Tale of GameStop’s Tape
GameStop had been the leading physical retail store for video games and consoles, both new and second-hand. However, the industry had suffered gradual losses as online stores increased in popularity. Furthermore, the COVID global pandemic compounded the situation.
In April of 2020, GameStop’s share pricing (ticker GME) went as low as $3.25. In September of that year, Ryan Cohen, an investor and founder of Chewy (an online pet food company), bought a substantial stake in GameStop. His idea was to push GameStop to move from a physical retail store to an online platform in a similar vein to Amazon or other dropshipping format such as Shopify and eBay.
This push to an e-Commerce platform was met with positive interest. By January 2021, Cohen and a couple of other associates supportive of this move were offered seats on the board. Within a week, the stock price of GameStop increased by triple digit percentages. This caught the eye of Wall Street financiers, who saw an opportunity to short the GameStop stock.
Short is actually short (pun intended) for Short Selling. It is a stock strategy by which an investor assumes a stock to be overvalued (or at least has a higher value than its actual worth), but has a likelihood of failing within a certain period of time. What happens is the investor borrows shares of a company through a broker and then performs the short sell, selling the borrowed shares en masse into the market. The idea is to induce the stock shares to fall in price.
If the price fall does happen, the investor then buys the lower priced stock again and returns the shares (that they previously borrowed and recently bought at a lower price). The investor profits by keeping the difference between the initial and short selling price.
Many consider short selling an underhanded tactic. Moreover, it is a big risk, big reward sort of gamble. The bad part is if the stock instead climbs in value, the investor will now shoulder the cost of the increased price that they initially borrowed from the broker to purchase the shares. Obviously when this happens, it is a loss. How big of a loss can be very big, as in the case of those who tried to short sell the GameStop shares.
Reddit Investors to the Rescue
A small army of investors had rallied to the GameStop shares. Spurred by the opportunity and potential of an evolving GameStop, the value of the company’s share rose. But financial firms such as Melvin Capital Management, Citadel LLC, and several others pushed their hedge funds in an attempt to short sell the rising GameStop shares.
That aforementioned small army of investors, especially the ones on the popular Reddit sub /wallstreetbets, got wind of this. In an unprecedented move, they helped to drive the value of GameStop shares up nearly 1,000%. From a roughly $200 million market cap at the end of 2020, GameStop shares are now valued at nearly $20 billion (as of this writing).
This, of course, drove the firms that were eyeing to short sell the company into massive losses. Wall Street became a chaotic nightmare. Some online brokerages, notably RobinHood.com, restricted buying GameStop shares in their trading operations. This has been viewed as an attempt to stave off the damage and financial bleeding experienced by the short sellers. However, the small investors supporting GameStop have pushed a class action suit against these brokerages in response.
The Aftermath of Resurgence of GameStop
The short squeeze being experienced by the large firms and the rebellion of small investors has opened up the proverbial can of worms. GameStop is moving forward with the potential idea of transitioning to e-Commerce. Meanwhile, other companies that were the targets of potential short selling such as AMC, Blacberry, and Nokia, have benefitted from the surge of interest this debacle has highlighted.
Because selling the GameStop shares are likely to raise the value at this current time further, the short selling firms are hedging their bets and holding the shares for now, but the Wall Street battle for GameStop is far from over.
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