The beginning of the year has already brought some volatility and uncertainty to the market with its, arguably, highest-profile event: the GameStop’ stock price rally.
Within just one month, GameStop’s stock price has risen more than 2000%, multiplying its market capitalization to $13,5 billion. At its peak, a single stock was worth $347.
Short sellers who bet on the company’s falling stock have lost $3.3 billion since the start of 2021 alone, according to the estimates by financial research firm S3 Partners. The losses amounted to $1.6 billion in a single day, Jan. 22, when shares rose 51%.
What is GameStop?
GameStop is a retail chain that sells video game consoles, video game discs and movies. The company’s stock price has been decreasing continuously for six years leading to 2020 and its profits have plunged, writes Bloomberg. In two years, sales fell 40% and equaled to $5.2 billion for 12 months. Moreover, the chain is expected to record losses in 2021 and 2022, according to the newspaper.
This is why the gaming company has become a popular short seller on Wall Street and one of the leaders in downside bets on the U.S stock market.
What happened to GameStop’s shares?
The slow but steady growth of the asset’s shares (which at the moment was traded at ~$12) started after an agitated Reddit user u/ronoron, a member of the “Wall Street Bets” community, posted a news about Melvin Capital hedge fund placing a large short position in GameStop shares.
Reddit users were furious that the hedge fund “got greedy” and “tanked” GameStop and remembered that in 2018 Melvin Capital made the same bet on a drop in Nintendo stocks. The members of the Reddit community argued that GameStop is undervalued and decided to teach Wall Street a lesson. Reddit users decided to start buying GameStop shares in order to pump the price up and make the hedge fund lose its bet.
The company’s stock soared on the news that Ryan Cohen, co-founder and former Chewy CEO, has joined GameStop’s board of directors. Cohen was hired to help develop the company’s online store. Short sellers no longer found it profitable to hold short positions and paid extra money to buy back shares, which “further spurred growth,” according to the company.
On Jan. 29 the European stock market opened sharply lower due to the turmoil. Retailers were temporarily unable to trade on Thursday as brokers, including popular online broker Robinhood, cut funds and restricted trading in some high-profile companies, including GameStop. However, Robin Hood said some restrictions will be lifted, raising fears that volatility will resume later on.
Aftermath
GameStop’s case is a unique occurrence that could change the way the stock market functions at its core. Though Wall Street giants continue to make the rules on the stock market, GameStop’s case could mean that individual investors entered the arena and are here to stay, without any compromises. It is possible that individuals will unite in support of other companies and that could lead to absolutely unpredictable outcomes.
What else happened?
The end of January also saw a sharp growth of BTC, after the world’s richest entrepreneur Elon Musk changed his Twitter status to #bitcoin. With this kind of an advertisement for the cryptocurrency, it quickly grew by ~20% in just one day.
Some investors suggest that the purpose of such a move was to redirect investor’s attention from the stock market’s frenzy and towards the cryptocurrency market, however, the true motive of this is unknown.
What is your opinion regarding this situation? Share your thoughts in the comments below.
Past performance is not an indicator for future performance.
