The GameStop news is out. If you didn't know GME before, now you do. The stock price has gone parabolic with a short squeeze and no fundamentals.
Well, that's the story widely being circulated, but there's more to it in our opinion.
Just two weeks ago, the financial media had printed little about GameStop. The gaming retailer was among Wall Street's most hated stocks with some hedge fund managers calling it the next Blockbuster. We took notice when Chewy.com co-founder Ryan Cohen acquired a 12.9% stake in GameStop last year for $76 million.
Here's a clip of Chris Wang presenting GameStop on the Runnymede Quarterly Call for clients held on January 11, 2020.
Fallacy of No Fundamentals
To say there are no fundamentals is an oversimplification. Historically, the release of new game consoles increases foot traffic to GME stores and boosts company's earnings. The new Sony PS5 and Microsoft Xbox Series X should do that as customers buy consoles and games. Today, the global pandemic has gamers eager to buy consoles and games resulting in console shortages. It's worth mentioning that both consoles still play game discs and DVDs so betting on the complete demise of this retailer could be premature.
Wall Street analysts are forecasting zero earnings this year for GameStop. If history is a guide when it comes to a new console cycle, GME should have positive earnings surprises throughout 2021. Factor in the potential of Cohen's RC Ventures plans to transform the company into a specialized e-commerce retailer of gaming products and you've got a case for positive fundamentals to drive the share price.
An Unthinkable Rise
Of course, that was at $20. The rise that we have witnessed from $20 to $380 is like nothing I've witnessed in my career. There has been a confluence of factors and consequences. Investors on the WallStreetBets subreddit forum have been promoting GameStop aggressively, openly comparing this phenomenon to a battle between David (individual investors) and Goliath (the Wall Street establishment.) Social Capital’s Chamath Palihapitiya jumped into the stock, tweeting Tuesday that he bought GameStop call options betting the stock will go higher. Even Elon Musk, co-founder and CEO of Tesla, weighed in with a tweet yesterday that drove the stock to new highs in after hours trading.
Meanwhile, Citron Research founder, Andrew Left gave up shorting the stock, citing harassment from an “angry mob” of GameStock investors. Melvin Capital Management closed out its short position and had to take in a nearly $3 billion dollar infusion to shore up its finances from Citadel LLC and Point72 Asset Management.
Investing versus Speculating
This is a classic example of investing and speculating. There is a difference and it can get very dangerous if you fail to recognize when one becomes the other. Not limited to GameStop, we are seeing a high short interest bubble whereby investors are specifically seeking to make quick money in stocks that have a high percentage of bets against them by short sellers.
Kudos to Brian McGough for being among those who made a great call on the long side. Yesterday, he reminded investors to keep a level head.
Once you've got a bubble, things don't make sense. Where is GameStop going next… $400, $500, $1000?! It may feel like the sky's the limit right now but be careful. It's always risky getting on a rocket ship. May you have a safe return to Earth, something that Elon Musk knows quite a lot about.