What’s Going on with GameStop?

Cole Glomski, Author

Near the end of January, we saw the GameStop stock price soar from barely double digits to just under $350 a share at its peak. Things seemed to have settled down during February as stock prices leveled out around the $50 mark. However, we have once again seen GME climb over 400% since that $50 value. Many attribute the recent rises in GME’s price to a large Reddit group called Wallstreetbets, who orchestrated a simultaneous buy earlier this year. However, this is not nearly the whole story.

With the release of the PlayStation 5 near the end of 2020, most gaming companies had the best growth they’ve seen in years. This wasn’t true for GameStop though, with even their fourth-quarter earnings ending up lower than expected. Their model is an outdated one, today the majority of video games are sold online, while GameStop remains the retailer of strictly physical copies of games. Any bettor who has done their research would realize that GameStop is a losing market and likely bound for bankruptcy. Seeing this, many Wall Street hedge funds decided to short GME (bet against). Making money on a losing company seemed like a great deal to many investors, but then came the short squeeze.

When Wallstreetbets, the aforementioned Reddit group, decided to buy into GME, they pushed the stock price up. When this happened many of the Wall Street hedge funds started going into deep debt on their short positions, as they could only make money if the stock price fell. Soon many of these funds decided to sell out of their short positions, a process known as covering. Covering requires buying back the shares you initially shorted, which in practice removes shares from the market. This caused the price to rise higher still, forcing even more funds to cover and creating a sort of domino effect that pushed GME to its peak price. Once at $350 the short holders that were willing to cover had already done so, and those who planned to hold wouldn’t waver. Members of Wallstreetbets and other GME buyers then quickly cashed in on their purchase and sold out of their shares, effectively dropping the stock to the $50 we saw throughout February.

During February’s calm, many more investors called shorts on GME, recognizing the bluff behind the price tag. Sometime late February original short investors likely decided to eat up whatever losses they might have incurred rather than sit through more GameStop volatility, those covers then started the domino effect all over again. The Reddit group has been recently invigorated with yet another short squeeze and has been adding to the fire by continuing to purchase shares. When this will all end is not entirely clear, but it is, at the least, an incredibly thrilling ride.