Not long-ago, GameStop’s story was much different from the tale that has been
generating press as of late. Just last April, GameStop was struggling to keep its head above water due to ongoing pressures of the pandemic and a shift in the gaming industry that pushed
business away from the company’s brick-and-mortar model. The onset of the pandemic also brought the announcement that the retail giant would be permanently closing 300 locations as well as positioning stocks at an all-time low. This news followed their reported $470 million in losses in 2019, eight years after reporting a $340 million profit.
As far as anyone knows, GameStop has not completed the greatest comeback story in the history of free enterprise. As a matter of fact, the company is actually closing more stores than originally anticipated at the start of the pandemic. Founded in 1984, the company had a simple business agenda, to sell video games and equipment out of its brick-and-mortar stores. As consumer buying behaviours turned digital, it became more accessible and popular for gamers to buy games online and download them directly to their consoles, causing the company’s business model to become less profitable. One thing has changed for the better: When trading ended on
Monday, GameStop stock had hit $76.79—four times its price to end 2020 and 23 times its price from the early days of the pandemic.
The strange saga of GameStop’s cult status can be traced back to last September when the famed investor and founder of online pet food giant Chewy, Ryan Cohen took a 13% stake in the retailer and started lobbying for it to move more of its business online to rival Amazon. Cohen and two associates were added to the company’s board in January. Two days after the announcement, GameStop’s stock surged more than 50 percent, going from $20.42 to $31.40 after reaching as high as $38.65.
The company’s share price began to skyrocket when an army of traders on the Reddit forum r/WallStreetBets single-handedly banded together to buy as many GameStop call options as possible, forcing it to halt trading multiple times. This also resulted in short-sellers betting against the stock, to lose a lot of money. This is because when a heavily shorted stock jumps in price because a group of individual investors decide to buy all at once, short-sellers that can’t withstand the pain start buying back shares to cut their losses. This in turn drives the price higher, causing
more pain to those short-sellers who are still in, and so on. Many Wall Street fortunes have been made this way, however, if the price doesn’t fall, the losses can be huge.
What Happens Now?
Even though GameStop’s current stock price is utterly irrational, as it will never make enough money to justify a $6 billion market cap, the power of retail traders cannot continue to be underestimated. What we have seen with GameStop is a remarkable testament to the internet’s ability to facilitate collective action, appearing less like a speculative bubble and more like an internet-mediated version of the “bull raids” that were a staple of the stock market in the early 20th century, when organized groups of investors would collectively join forces to drive stock prices up.
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