GameStop short squeeze: Beating Wall Street at Its Own Game - Numbers.lk
The struggling video game retailer GameStop is suddenly one of the hottest stocks thanks to a group of Reddit users looking to take on the financial elite.
28 January, 2021 | 11:25 a.m.
On Wall Street, individual investors are often derided as “dumb money,” destined to lose against the highly compensated analysts and traders who buy and sell stocks for a living. But in recent days, individual investors — many of them followers of a popular, juvenile, foul-mouthed Reddit page called Wall Street Bets — have upended that narrative by banding together to put the squeeze on at least two hedge funds that had bet that GameStop’s shares would fall.
It's not hard to understand why someone would short GameStop, however. The company is expected to lose money this year and next. Sales growth is sluggish because gamers no longer need to go to the mall to buy games or consoles. That said, some investors have argued that GameStop was seriously undervalued, especially when video games have become staples of the stay-at-home pandemic era.
The GameStop stock surge began for a legitimate reason: The company announced on January 11 it had added three new directors to its board, including Chewy co-founder Ryan Cohen. Investors liked that Cohen brought digital experience to the table, something the largely brick-and-mortar GameStop desperately needs, as video games go digital and malls continue their unending slump into irrelevance.
GameStop's stock rose a little less than 13% that day. But this wasn't a normal, momentary stock surge. Two days later, it rose 57%. Then 27%. The next week, it surged 10% twice and 51% another day. This week, it rose another 18% then 93% and more than doubled today.
While the hedge funds and other professional money managers had been shorting GameStop’s shares, betting that its stock was doomed to further decline, the retail investors — online traders, mom-and-pop investors, small brokers and others — have been pushing the other way, buying shares and stock options. That caused GameStop’s market value to increase to over $24 billion from $2 billion in a matter of days. Its shares have risen over 1,700 percent since December. Between Tuesday and Wednesday, the market value rose over $10 billion.
Sri Lankan born Billionaire tech investor Chamath Palihapitiya defended the power of individual investors to compete with Wall Street hedge funds on CNBC. The CEO of Social Capital and former Facebook executive tweeted Tuesday that he bought $125,000 worth of February $115 GameStop call options after asking his followers on Twitter what to buy.
Palihapitiya dismissed Wall Street criticism about how individual investors are banding together on social media — particularly the wallstreetbets Reddit message board, and short-squeezing GameStop and a handful of other stocks like pros — as hypocritical. He said hedge funds try to push stocks around all the time.
Allowing hedge funds to go short 140% of GameStop shares could be seen as irresponsible, he said. “To a normal person that doesn’t make any sense. But to a Wall Street mathematician, that’s the game that’s been played. And that game came undone.”
The tribal framing online, as a kind of team sport pitting plucky upstarts against well-heeled Wall Streeters, has been especially helpful in motivating more investors to participate. This week, Tesla’s chief executive, Elon Musk, fueled the trading by posting about the Reddit page on Twitter. And speculation is growing that other investors are seeing fresh opportunities to push the stock even higher.
There's an argument that GameStop was undervalued, but hardly anyone believes that GameStop, BlackBerry, Macy's, AMC, or any of the other companies that WSB is promoting have fundamentals to support these surging stock prices. At some point, reality has to set in.
But that's the problem with bubbles — get out too early, and you lose at a chance to cash out on top. So GameStop keeps surging ... until it won't anymore.
The GameStop saga is a battle of new school vs. old school, amateur vs. professional, rebels vs. the establishment. At the moment, the kids are winning. But, like all bubbles, this one's going to burst at some point.
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