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GameStop stock price still hitting records as Redditors squeeze short sellers

Bubble expected to burst, but not before Redditors hand investors their heads

A man wearing a face mask leaves GameStop with the new PlayStation 5
A buyer picks up a PlayStation 5 at the Wilkes-Barre, Pennsylvania. GameStop on Nov. 27, 2020.
Photo: Aimee Dilger/SOPA Images/LightRocket via Getty Images
Owen S. Good is a longtime veteran of video games writing, well known for his coverage of sports and racing games.

GameStop’s stock price, which had dropped steadily over the previous five years before beginning a climb last fall, closed at an all-time high on Friday following a tremendously volatile week in which Reddit-organized day traders made a lot of trouble for investment firms short-selling the stock.

Trading of GameStop stock on the New York Stock Exchange was halted twice Friday, but not before the price peaked at $73.09. It closed at $65.01, beating the previous record of $63.30 set on Dec. 24, 2007. GameStop closed on Thursday at $43.03, and when the surge began last week, it was around $20 a share.

What’s going on? Well, at the beginning of September, the stock started rallying out of the $5 doldrums where it had been for a little over a year. That’s because dog food tycoon Ryan Cohen (the founder of Chewy, which he sold for $3.35 billion in 2017) had just purchased a 10% stake in the beleaguered video game retailer. He and two allies have since joined GameStop’s board of directors, and those positions could help Cohen act on his tough talk about where GameStop’s priorities should be. Cohen says the Texas-based company needs to give up its continued brick-and-mortar retail focus altogether and move to “a technology-driven vision.”

What’s behind the eye-popping stock price surge this week, reports Ars Technica, is “a massive short squeeze bubble.” In the investing practice known as short selling, a party borrows shares of a stock and immediately sells them at the current market price; when the price later drops (as a short seller is betting it will), the short seller buys back the same number of shares to return them to the lender — and makes money by having to pay back less than what the shares were worth at the time of borrowing.

In this case, GameStop’s stock price is rising, forcing these short sellers to buy more shares at a higher price to cover their positions. That has put GameStop’s stock price in an upward spiral, one that analysts like Wedbush Securities’ Michael Pachter think will quickly come to an end.

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

The smart money got in more than a year ago, reports Motherboard. Some of it came in from investors on the subreddit WallStreetBets, a community that styles itself as “Like 4Chan found a Bloomberg Terminal.” A Redditor there posted screenshots from 2019 of a $50,000 purchase of GameStop shares, when the stock price was below $1.

That’s because WallStreetBets (and others) reasoned that if they bought in to GameStop, short sellers would eventually have to cover their positions together, driving the price way up. “There is likely not an original GameStop-issued share left on the market,” noted one Redditor. In other words, GameStop has issued more shares than are actually available to buy. Higher demand plus scarce supply equals a higher price, of course, and short sellers buying up stock to cover their debts — along with, of course, interest from new investors looking to short the stock — is what’s driving the demand.

Citron Research is one of those short sellers, and on Friday the firm said it was no longer commenting on GameStop’s stock because “an angry mob” had made it a dangerously volatile stock, Bloomberg reported. Citron also alleges that these miscreants had tried to hack the company’s Twitter account, after the company criticized the stock on Tuesday and then made plans for a livestream on social media to discuss that.

GameStop’s closing price on Friday gave it a market capitalization of $4.5 billion, almost 20 times higher than what the company was worth as of late July. But none of this means GameStop has actually recovered or saved itself as a business. Indeed, its last quarterly earnings report, in December, showed revenues still declining and losses per share increasing over the same figures a year before.

In the past two years, the company has closed more than 750 stores out of the 5,700 locations it had as of 2019. The same year, the company got rid of top executives and fired more than 100 corporate staffers, in a round of layoffs that also gutted the staff of GameStop-owned Game Informer magazine.

Update (Jan. 25): GameStop’s stock price is still extraordinarily volatile, and an all-time record $88 as of the time this update was published. At 11 a.m. ET, it had been trading at $138. Bloomberg’s report this morning said the rally is still “arguably organized in chat rooms,” where users are burning institutional investors who have shorted 139% of GameStop’s shares.