To accomplish that a seller typically borrows stock from someone, usually an investment bank, then sells it. This means that investors sell stock they don't have, then hope the price goes lower so they can buy the amount of shares they sold at a lower price at a later date. GameStop was a major target for financial firms who were shorting the company-many investors on the WallStreetBets subreddit believe that a few investment firms have shorted millions of shares of GameStop. This has seemingly happened because of some relatively complex stock market machinations. It closed hundreds of stores in 2020 and owes almost half a billion dollars in short- and long-term debt.Īnd yet GameStop's stock has gone through the roof. It’s a brick-and-mortar store in a business that’s increasingly moving to digital sales. In general, GameStop hasn’t been doing well. In August, members of the subreddit began buying up shares in GameStop and several offbeat investors started to tout the stock's virtues. Even though I see more pain ahead for short-sellers I will stay away from GameStop.Wallstreetbets is a subreddit filled with chaotic investment advice and surreal memes.
#Gamestop short squeeze free
I would consider buying these shares if the company had real prospects for top-line growth and positive free cash flow. Ihor Dusaniwsky, the head of predictive analytics at financial technology and analytics firm S3 Partners, told Dow Jones that he thinks the stock is being driven up by its board shakeup and stronger holiday sales. Wedbush Securities analyst Michael Pachter told the Journal that short sellers are overlooking demand for GameStop’s used items which it sells in its roughly 5,000 stores. There are some who are bullish on GameStop’s fundamentals. Meanwhile, Bell proudly pointed out that since the end of 2018, GameStop has closed 1,020 stores. GameStop suspended guidance for the fourth quarter but excitedly touted a 352% increase in its e-commerce sales - sadly the revenues are not reported separately which I interpret to mean that the amounts are not significant. GameStop lost $18.8 million in the quarter and burned through $200 million in free cash flow - leaving it with $450 million in cash on its balance sheet, according to Morningstar. As CFO Jim Bell said in the company’s third quarter earnings conference call, net sales of $1 billion were 30.2% lower than the year before. GameStop revenue has plunged, it lost money, and burned cash. In short, Cohen’s proposal is what GameStop has been doing. In December 2020, GameStop said it had “closed more than 460 stores during the first three quarters of its fiscal year and reported stronger demand across its e-commerce unit,” noted the Journal. That is what GameStop was doing throughout 2020. It does not take a genius to realize that when videogames can distributed digitally there is far less need for the retail store network built to distribute them via physical media (like DVDs in boxes).Ĭohen has been urging GameStop to respond to this reality by closing physical stores and distributing games digitally. GameStop’s Miserable Performance And Prospects What drove up GameStop’s shares was a short-squeeze on steroids. That is possible because “traders are able to borrow shares from other investors, and those shares can be loaned more than once.” According to the Journal, at the end of December more than 138% of its shares available for trading were sold short.
GameStop is one of the most heavily shorted stocks. The more such short sellers are buying, the faster the price rises - and the higher the price, the bigger the short seller’s losses. This leads to a buying panic as short sellers go into the market to buy the shares. When that happens the broker who lent the shares to the short seller demands that the loan be repaid right away.
Instead of the stock’s price dropping below the level at which the short seller sold, the price goes up. That is what happens when someone bets that a stock will drop by borrowing shares from a broker, selling them in the open market, and hoping to repay the stock loan by buying them back later at a lower price.Ī short-squeeze occurs when the short seller’s bet goes bad. Why should that make GameStop 57% more valuable than it was the day before? It helps to understand how short selling works.
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