What's going on with GameStop?

As I write this, GameStop's pre-market stock price is around $140. It seems baffling that a brick-and-mortar company in steep decline would receive such strong support in the stock market. Even when you look at their financial statements, it is clear that they have been operating with a net loss for years. So, why is this happening? Simply put, GameStop's stock is in a short squeeze.

It should be known that all short positions are publicly available information, so soon enough r/wallstreetbets found out about the GameStop situation in around the Spring of 2020. As a community they believed the stock was over shorted, and thus putting their money were their mouth is bought the stock. One user of note is u/deepfuckingvalue, who invested $53,000 in the Spring of 2020. They have now seen astronomical gains and as of 26th January 2021, have made around $23,000,000. During Spring 2020, GameStop was still a murmur that was mostly contained in the subreddit, but by November 2020, GameStop would reach the mainstream. 

 Before we tell this story, I feel it pertinent to first explain what a short is. Let's say that Person A believes that a stock valued at $100 will gradually fall to $50, for example purposes Person A believes that the company will continue to operate at a Net loss and has no growth potential. So, because of this belief Person A goes to his broker and borrows that $100 stock and then proceeds to sell it to a buyer at the same price. Once, the stock price falls to $50, Person A will buy back the same amount of stock he borrowed from the broker and give it back to them. Person A will pocket the $50 difference minus the interest expenses that comes with borrowing the stock. However, what happens when the stock price goes up to $150 or even $200. Person A would be but in a very difficult situation, since they would be losing a lot of money, so in order to mitigate their loss, they would have to buy the stock at a higher price. This is the situation that happened with GameStop.

This story starts with hedge funds all over Wall Street shorting GameStop by 140%, a ridiculous number which means that there were more stocks shorted than actual stocks available. This was based on the belief that GameStop, primarily a seller of physical games and accessories, had no room for growth potential. This wasn't only because of consumer product-selling giants like Amazon and Walmart eating bigger slices of the pie, but also because of the increasing shift in digital games as an alternative. Digital storefronts were firmly established in the PC market already with Steam, but digital sales in the console market have increased year after year as well with the PlayStation Store and the Xbox Games Store. Thus, hedge funds shorted GameStop, because they believed they had no future, and its hard to argue against it.

In November 2020, Ryan Cohen, the former CEO of Chewy, bought up a significant stake in the company. He wanted to steer the GameStop ship into a different direction, going from brick-and-mortar to a robust e-commerce platform. Cohen believed a successful transition was possible because of GameStop's brand recognition and large customer base. This news helped GameStop reach the public-eye to a certain extent, thus allowing there to be some belief in GameStop as a business. 

The short squeeze is still going on, with no clear indication of when it will end. At the end of the day, the users of r/wallstreetbets are pushing GME to the moon. But due to a lack of experience in these types of situations, some users will be the last one with the bag, and thus the biggest losers in this situation. Well probably second only to the Wall Street shorters who have collectively lost around $1.6 billion in a single day.