GameStop action hits all-time high as short sellers take on Redditors

GameStop’s stock price, which had fallen steadily over the previous five years before starting to climb last fall, closed at a record high on Friday after an extremely volatile week in which organized day traders by Reddit have done great harm to investment firms. -sell the stock.

Trading in GameStop stock on the New York Stock Exchange was halted twice on Friday, but not before the price hit a high of $ 73.09. It closed at $ 65.01, breaking the previous high of $ 63.30 set on December 24, 2007. GameStop closed Thursday at $ 43.03, and when the surge started last week it was around 20. $ per share.

What’s going on? Well, at the start of September, the stock started to come out of the $ 5 slump it had been in for just over a year. That’s because dog food mogul Ryan Cohen (the founder of Chewy, which he sold for $ 3.35 billion in 2017) had just acquired a 10% stake in the video game retailer. besieged. He and two allies have since joined GameStop’s board, and these positions could help Cohen follow through on his difficult talk about GameStop’s priorities. Cohen says the Texas-based company needs to completely abandon its continued focus on retail and move to “a technology-driven view.”

What is behind the surge in stock prices this week, reports Ars Technica, is “a huge squeeze bubble.” In the investment practice known as short selling, one party borrows shares of a stock and immediately sells them at the current market price; when the price drops later (like a short seller bets he will), the short seller buys the same number of shares back to the lender – and makes money by having to pay back less than the value of the shares at the time of borrowing.

In this case, the GameStop share price is on the rise, causing these short sellers to buy more shares at a higher price to cover their positions. This has put GameStop’s stock price on an upward spiral, a spiral that analysts like Michael Pachter of Wedbush Securities say will end quickly.

“The smart money has already come in and probably out,” Pachter told Ars.

The smart money arrived over a year ago, Motherboard reports. Part of it came from investors on the WallStreetBets subreddit, a community that bills itself as “Like 4Chan found a Bloomberg terminal”. A Redditor posted screenshots from 2019 of a $ 50,000 purchase of GameStop shares, when the share price was below $ 1.

This is because WallStreetBets (and others) thought that if they bought at GameStop, short sellers would eventually have to hedge their positions together, driving the price up. “There is probably no more original action released by GameStop on the market,” noted a Redditor. In other words, GameStop has issued more shares than is actually available for purchase. Higher demand coupled with scarce supply equates to higher price, of course, and short sellers buying stocks to cover their debts – as well as, of course, the interest of new investors looking to bypass. actions – is what drives the demand.

Citron Research is one such short seller, and the firm said on Friday it was no longer commenting on GameStop’s stock because “an angry mob” had made it dangerously volatile, Bloomberg reported. Citron also alleges that these infidels attempted to hack the company’s Twitter account, after the company criticized the action on Tuesday and then scheduled a live social media stream to discuss it.

GameStop’s closing price on Friday gave it a market cap of $ 4.5 billion, nearly 20 times what the company was worth at the end of July. But none of this means GameStop has actually recovered or backed up as a business. Indeed, its last quarterly report on earnings, in December, showed revenues still falling and losses per share up from the same figures a year earlier.

In the past two years, the company has closed more than 750 out of the 5,700 locations it had in 2019. In the same year, the company shed its top executives and laid off more than 100 employees from the company. company, in a series of layoffs that also drained the staff of GameStop-owned Game Informer magazine.