GameStop, it’s not the end of the Road, as we know it!
Co-Authored by David I. Shiner & Heath Wruble
In recent days we have been discussing the Robinhood GameStop saga, where everyday traders pushed GameStop (GME) to new heights, closing at $347.51 on January 27, 2021 from a low of 17.25 on January 4, 2021; at one point in the trading cycle the stock hit dizzying heights of $483 then fell back to $40.69 on February 18, 2021. An amazing ride for one company which most people never heard of (unless you started growing grey hair). For some GameStop was a retail shop the kids stopped in while at the mall, for others they saw a retail outlet but never set foot inside.
GameStop is a retail store, mostly based on malls across America, they sell video games, video game consoles, and hardware and accessories. Most of GameStop’s sales where done via brick and mortar retail store fronts located in malls, some until recently have been through online sales and home delivers – think Blockbuster Videos. Fundamentalist, investors who review the data of the company before investing - meaning they review cash flow, revenue, sales, EBITDA, capital management, leadership, industry competition and new technologies which may effect the performance of the company - saw this company as a dying breed. Again, something akin to Blockbusters, a company who failed to pivot with technology and went bankrupt.
Based on the fundamentals of the company, these investors seemed to be on to something, after all video game developers were starting to stream their games directly through the game consoles rather than sell the video game DVD’s in retail stores such as GameStop, BestBuy, and Walmart. Additionally, it appeared that revenue was constantly falling, especially with the current pandemic crisis and less traffic going to actual bricks and mortar store. With the path to future profitability in doubt, investors decided to bet against the stock. When an investor bets against a stock they “short the stock.” A “short” is where an investor borrows the security at a high market value in hopes that the stock drops where they can buy it at a lower market value and give the stock back to the lender. As an example, if I short XYZ, I would borrow 100 shares from the lender at $100, thus I would receive $10,000; if the stock drops to $20, I would then buy the stock back at $20 costing me $2,000 and make $75 per share or $8,000. A pretty good deal, however if the stock goes against me and goes to $150 a share, I would be forced to buy the stock back at $15,000 giving me a loss of $5,000. Now imagine this in thousands of shares being shorted around $40 and the stock price rising to above $300, the investors who shorted the stock would be in big trouble, losing billions of dollars.
This is exactly what happened. The Reddit traders (those following the message boards) decided to get in on the Wall Street action by sticking it to the large hedge funds who did not see much promise in the stock. The saw that GameStop was the target of large institutional investors betting against it, fought back, they started to buy the stock and pitch the stock to other smaller investors, soon, the word was out, GameStop was at play, investors were betting the stock would go up, so everyone started to buy and the hedge funds started to get squeezed, they were forced to start buying the stock to cover their losing bets, the stock started to rise and rise and rise, soon the market value reached extraordinary heights. Then it didn’t, eventually the stock started to lose value and until February 25, 2021 traded around $40 to $50 a share.
A few things occurred, that we will not delve into again, but if you’re interested read our recent article titled Robinhood or Robbing the Hood! and Robinhood Part Duex! These article will help you get a better understanding of the first half of the story. We thought this is where the story ended, but we were wrong. The story continues.
Then the other day (February 24, 2021 and February 25, 2021), late in the day, GameStop started to rally again. Pushed by two news items, one the Reddit warriors were at it again, seeing the large hedge funds were back at the shorting game, betting against their favorite stock and the news that Chief Financial Officer Jim Bell was ousted from the company. Reports indicated that major investor and the online pet supply company, Chewy co-founder Ryan Cohen forced the ousting of Mr. Bell in order to help transition the company from a retail outlet to more of an online retailer.
Where do we go from here? It is clear that activist investors such as the Reddit Warriors will play a role in the market for the unforeseeable future, where they believe there is a cause and a way to make money, they will step in and do exactly what large institutional investors have been doing for years and boards and other large investors are going to start to react more aggressively to the voices of their investors. In the case of GameStop, investors saw that the old retail shop model was outdated and voiced their concerns via betting against the stock; the activist Reddit Traders worked hard to force the hedge funds to cover their bets and in the process lose money. Both types of investors made their point, change within the company was needed and in the process the company, despite the volatility in their stock price, may have won and may live to see another day, after all business transitions are always necessary in order to keep a company relevant.
If you or a loved one been harmed due to this recent market volatility, or if you buy securities using the Robinhood platform and were unable to liquidate? Are you looking for answers regarding other financial losses because of poor or inappropriate financial advice? If so, then call us, the Shiner Law Group at 561-777-7700 to speak to one of our experienced litigation attorneys today to find out how we can help you navigate the legal obstacles to recover your money.