Understanding the Historic Rise and Fall of Gamestop Stock
The wild ride of the video game retailer GameStop’s stock has been the biggest financial story of early February. On Jan. 4, the stock was valued at $19 per share. 24 days later, the stock price hit $483 per share. From the start of 2021 to the stock’s highest point, the stock endured a 2442 percent increase. However, the reason for GameStop’s astronomical rise has little to do with the company’s performance. This week five years ago, Amazon’s stock was valued at $507 per share, and today it’s worth $3351. In five years, Amazon’s stock price increased roughly 560 percent.
Five years, 560 percent. Three weeks, 2442 percent.
GameStop is a brick-and-mortar retailer trying to survive in the middle of a pandemic that makes the notion of shopping in a small video game store a life-threatening proposition. Its main product—video games—can be purchased easily online. Game consoles can be delivered to your door with two-day shipping. GameStop, for all intents and purposes, is a relic of a bygone era where most things in life were not purchased online. It’s been replaced by more efficient platforms for the distribution of their product.
Professional stock traders had bet against GameStop’s success by “short selling” the stock. Imagine that an investor borrows a share of a company and sells it at the market price of $100. Having borrowed that share, the investor will eventually have to buy it, but the investor is expecting the stock price to fall by that time. Say the stock price has dropped from $100 to $90 by the predetermined expiration date. The investor buys the share back at $90 and makes a $10 profit. This is what many hedge funds were hoping to do with GameStop. As the pandemic ate an old relic alive, the heavily shorted stock would fall, and the money would roll in.
Enter, r/WallStreetBets (WSB), a meme-fueled subreddit forum.
New York Times reporter Taylor Lorenz described the investor group forum, “it’s like if the normal world of stock trading took a bunch of shrooms and started live streaming itself.” It’s quirky, irreverent, community-driven by retail investors willing to take a shot on whatever stock the community is hyping up at a particular time. They share their stories of loss as proudly as their gains and discuss their daily moves in a vernacular of inside jokes and insults.
WSB members bought GameStop shares with the hope that they could drive the price up to the point where short-sellers would be forced to cover their positions at a loss. They believed that the stock was undervalued and knew that the stock was heavily shorted. In the investing world, this is what is known as a “short squeeze.” Referring to the example above, they’d have to buy the share back at $110 instead of $90. In the rush to purchase more of the stock before the price got too high, short-sellers would exert upward pressure on the price, driving it “to the moon,” as WSB would say.
Enabled by intuitive, smartphone-based investing apps like RobinHood, amateur investors are in the unprecedented position of being able to move the market with a couple of swipes. For better or for worse, the barrier of entry into the world of investing has lowered. This, the GameStop event proves, has significant implications.
The WSB plan arguably worked. David Ponta, an amateur investor and avid follower of WSB, said “It went up to $485, it’s obviously not worth that much.” But many members of WSB held on, believing that the spike was merely a harbinger of things to come. Mr. Ponta had bought 16 shares of GameStop (GME) at $16 per share. He sold them “in a dip,” making a small profit while the price was still on the upswing. At $279 per share, he bought back in and held those shares until long after GME had peaked. He sold them for a loss last Thursday.
Mr. Ponta is also an accounting student from York, Pa. who has been a hobbyist investor for over two years. He admits to holding onto his shares for too long, swept up in sentiment surrounding the WSB plan. Ponta was fortunate in that ultimately his loss was a small one. For many others, the losses have been catastrophic.
The New York Times, Financial Times and The Washington Post have all run stories since the start of February on the losses suffered by amateur investors who were caught up in the ‘hype’. Ponta says that loss is at the core of the WSB experience. At its core, it’s a high-risk investing forum where people are trying to get rich on long odds. They describe your first big loss as “Paying your WSB tuition,” Ponta said. He also talked about a time where he had put $1800 into long-term, out-of-the-money option calls, He canceled the order almost immediately, thinking it wasn’t worth the risk. “They’re worth $60,000 today,” he said, “I would have had a down payment for a house.” Rather than lament his missed opportunity, he printed out a screenshot of the canceled order, almost proud of it. “That’s what WallStreetBets is about,” Ponta said
The forum itself has experienced an unlikely rise. According to Ponta, WSB had around two million members in early January. Today, it has 9.1 million. “If you think 8 million people who use Reddit can control the stock market, don't join WallStreetBets,” Ponta said. He pushed back against the notion that coordination among members of the forum will lead to a significant shift in the investing world. Yet it’s hard to ignore the impact of the fact that the GameStop event has been international news for the better part of two weeks. On Feb. 8, the New York Times published a piece titled “Short-Sellers Fear for the Future,” reporting that there is real fear among hedge fund managers who engage in short selling because of the power of “internet-enabled herds.”
GameStop’s stock price sits at a meager $46 today. While a select few members of WSB still believe in GameStop’s future, the mood is more gloomy than it was at the end of January. While it’s not yet clear what the full effect of the GameStop saga will be on the world of investing, one thing’s certain: retail investors have made their voice heard, and Wall Street is just going to have to listen.