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GameStop: Crushing The Fortunes Of Short Sellers

Game retailer, GameStop (NYSE:GME) has witnessed a meteoric rise in its stock price over the past few weeks. It has been one of the most affected stocks in what can be termed as a truly historic Wall Street event involving one of the largest transfers of wealth from professional investors to retail momentum traders.

Despite no significant news on the side of the GameStop management, the company’s stock price has had a spectacular run as it appreciated over 3,000% from its levels about 5 months ago, close to 685% since 2021 started, and over 250% since this week began.

GameStop’s Business

GameStop is basically a multichannel video game, consumer electronics, and collectibles retailer in the United States, Canada, Australia, and Europe. The company has a physical retail focused business model and retails new and pre-owned video game platforms; accessories, including controllers, gaming headsets, virtual reality products, and memory cards. It also sells video game software, in-game digital currency, digital downloadable content, network points cards, prepaid digital and prepaid subscription cards, collectibles, and gaming merchandise. GameStop has a large physical presence with over 5,500 stores (including the Zing Pop Culture and ThinkGeek brand stores for collectibles) across 14 countries in the world.

The COVID-19 Impact

Prior to COVID-19, GameStop was known to have a turnover above $8 billion but its business was heavily hit by the pandemic resulting in store closures for many months followed by ridiculously low gamer traffic in its stores even after the lockdown being lifted in North America and Europe. The company did manage a quarterly run rate of close to $1 billion largely because of its digital marketing strategy. GameStop does have an e-commerce presence through the GameStop, EB Games, and Micromania brands which helped it thrive in the pandemic but its stock price crashed with institutions continuing to hold short positions on the stock.

The Short Squeeze

GameStop was heavily targeted by the bears and had a short interest as high as 260% in December 2020 which means that the average share of the company had been borrowed and sold a staggering 2.6 times. It was clear that a large majority of the market was betting against the stock but the tables turned with Reddit-driven short squeeze. In a co-ordinated effort that originated on the WallStreetBets subreddit and spread across more than 2 million users as well as on zero-commission trading platform, Robinhood, GameStop witnessed what can be termed as a once-in-a-lifetime short squeeze event. The bears had taken too much of a risk by holding onto a short position for too long and the poor risk management resulted in them being forced to cover their short positions by buying the stock at sky-high prices resulting in huge losses. The retail investors who co-ordinated the short squeeze made huge profits on the other hand and the trades made up for all their notional losses on the GameStop stock in the COVID-19 pandemic. Among other stocks that benefitted from a similar kind of mayhem were AMC Entertainment, Blackberry, and Bed Bath & Beyond.

How GameStop Can Capitalize

GameStop should benefit from this rapid stock price upward movement and could consider a well-priced secondary offering to fund its operations and future growth. The advantage to the company doing it is it carries no risk for them since they issue the stock. GameStop’s fundamentals are weak and it does not appear in a position to deliver strong results so the uptrend could be shortlived. However, a share issuance at this stage would not be surprising at all. There could be no better time to bootstrap value into the company’s share by doing secondary offerings and raising to invest in the business. If the company can overcome the SEC hurdles for fundraising, it could witness a dramatic turnaround in the second half of 2021 with a greater focus on digital marketing of its products to make up for the revenue losses from the physical store closures. However, it is critical for the management to act fast as analysts are already forecasting a big plunge in the stock. Bank of America analyst Curtis Nagle is already expecting another big crash in the stock in the coming months. It is to be seen how the management can capitalize on this short squeeze frenzy.

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