Gambling with bankruptcy candidates: Online forum chases Gamestop to the top of the stock market

Tuesday, January 26, 2021

Gambling with bankruptcy candidates
Online forum chases Gamestop to the top of the stock market

By Diana Dittmer

The Gamestop share is experiencing a rocket rise. In an Internet forum, new intrepid small investors encourage purchases and drive tough stock market professionals into the parade. That could further heat up the course of the computer games chain.

The hot IPO at US video game retailer Gamestop continues unchecked. Since the beginning of the year alone, the papers have gained more than 250 percent to around 77 US dollars. It's a staggering development. In the summer of 2020, the titles were still available at a bargain price of less than three dollars for fear of business difficulties. Since then, things have been steadily improving. But why?

Actually, Gamestop has long since passed its prime. In 2007 the price was quoted at $ 65, after which the air was out. The business model is outdated, in the gaming scene much criticized for lousy service, plus red numbers, at some point branches were closed. Things looked anything but rosy for the company. A turnaround was not in sight. Gamestop was considered a bankruptcy candidate. The price development over time reflects the decline until the bottom was reached in April 2020. Then the unexpected happened.

There are different explanations for the course rally: One is the corona crisis. The gaming industry is booming in the pandemic. The sales figures have increased significantly in the Christmas business. The entry of investor Ryan Cohen in September 2020 is also considered a price driver. The successful co-founder of Chewy, an American online pet food retailer, took over ten percent and became the largest single shareholder. In the meantime he has increased his stake to 13 percent and has moved into the supervisory board. The fact that he can now actively intervene in the business is well received by stockbrokers.

Cohen has a good reputation. His promise to turn the slow-moving Gamestop into a booming e-commerce business with first-class service is bought from him. He sold Chewy for $ 3.35 billion. Customer service is very important to the company. Why shouldn't Cohen do the same with Gamestop?

The problem is that the competition is not sleeping. Despite the corona boom, Gamestop's sales have fallen by 40 percent in the past two years. Losses are expected for both 2021 and 2022. The analysts' average target price is 12.50, 80 percent below the closing price on Friday. The question of whether it even remotely depicts what Gamestop can redeem in the future is justified.

Battle between day traders and shortsellers

The real reason for the price explosion is actually to be looked for elsewhere: The stock market turbo really sparked a battle between young and intrepid Robinhood investors and day traders on the one hand and professional shortsellers on the other. While some agreed to buy Gamestop in an Internet forum called Reddit (and thus drove the price up), the others (who had bet on falling prices) came under increasing pressure.

There is no official information about the number of shares that will be sold short. According to the US stock exchange broadcaster CNBC, the analysis house Factset estimates the share in Gamestop at 138 percent of the shares in circulation. This means that more pieces of the paper have been sold short (shortened) than are available in the past few months. Gamestop is one of the most short-selling stocks on the US stock exchanges.

Indeed, the powerful short sellers seem to have found something of a masterpiece in the extremely powerful Internet forum. Reddit is one of the most visited portals in the world. Over 540 million people visit the site every month. All sorts of stories go viral here, and Robinhood traders regularly advise on which stocks to invest in: Gamestop received 15,000 comments within two days.

The more these traders drive up prices with their comments, the more the shortsellers are forced to buy back their shares in a rising market, i.e. more expensive. And not cheaper, as they actually wanted. If many shortsellers meet few sellers, your bets no longer work. The short sellers then have to offer higher and higher prices to get their papers. It's a fatal spiral, and you yourself see to it that the course keeps climbing.

The hottest stock market ride so far took place on Friday. According to the data provider Refinitiv, almost 20 million Gamestop papers were traded on the New York Stock Exchange. In the case of the most traded Tesla share, it was only 200,000 more. As a result of the "short squeeze", the price jumped to almost $ 160.

The best thing Gamestop management can do is take the opportunity to raise new shares and thus bring fresh capital into the company. This would give the company the means for the transformations it needs to grow. However, it will not be a sure-fire success either. For investors, this means exercising caution.