The recent GameStop’s (GME) share price eruption has resulted in significant losses for several of the most experienced hedge fund managers and massive gains for some members of the reddit subreddit /r/WallStreetBets who have managed to drastically inflate the share price of the company
Published March 2021
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GameStop is an American video game and electronics retailer. Currently they are the world’s largest video game retailer, with 5,509 shops which are mainly located in the United States.
The company has struggled in recent years due to a continued reduction in brick-and-mortar retail sales, with more people choosing to shop online and does not expect to turn a profit until 2023.
Reddit is a social news aggregation and discussion website that is consistently ranked in the top 20 most-visited websites in the world, according to Alexa Internet.
/r/WallStreetBets is a subreddit – a forum within Reddit that is focused on a particular topic of discussion. The users have set the subreddit description to “Like 4chan found a Bloomberg Terminal”.
Users of the subreddit discuss share and option trading primarily. There are some examples of detailed rational market forecast that can draw a lot of support from the two million strong user base, but the majority of the content seems to be designed to generate laughs via mockery of market participants and fellow users.
Most of the investments discussed are highly speculative and short-term.
Towards the end of 2020 users of /r/WallStreetBets began posting favourable comments about GME, with some noting that other big-name investors held a position in the company, that the executive team had relevant expertise, and that the video market was due an upswing with the release of the latest round of consoles. Most critically however, users noticing how popular the game was becoming with short sellers.
Short sellers borrow shares of company before selling them at market price, hoping to buy them back later for a lower price, pocketing the profit. If the share price rises however, they may be forced to buy back their shares (further inflating the price in what is known as a ‘short squeeze’).
As the popularity of GME surged with users piling in to buy shares driving the price higher, hedge funds with considerable short positions booked bigger and bigger losses and were forced to buy back shares at a loss.
The net result is GME’s share price rising from c. $20 to over $300 in a matter of weeks in January and has been volatile ever since.
Looking at the company’s financials, the current share price of $200 is unjustifiably high, and at this point it seems interest is driven more to continue the disruption it is causing to more established market players and the drive further profits for those that are holding their positions.
No doubt this will give short sellers caution, and it will be interesting to see if WallStreetBets can replicate their success with other shares that have significant short positions.