Wallstreetbets & GameStop

[Achtung Englander]

This from my newsletter I wrote yesterday


Do not get confused by all this craziness. GameStop is a troubled company.

Yes, it is amusing to see some small investors become millionaires overnight but there is a fundamental danger. GameStop is being used as a pawn in the casino that is Wall Street, nothing more. The massive increase in its share price is contradictory to the realities of where GameStop is and where it is going, just look at the line from 2016 to 2020 in the graph above. Make no mistake, the raison d'etre for all this bet and counter-bet on its share price comes from the fact GameStop, as a business, was going one way. Down. Not only was the company making less money, but it was also losing money as well. This was why the hedge funds betted against them. They did the math.

In its financial 2018 report the company net income was negative $795 million. In its financial 2019 report the company net income was negative $464 million. In the first nine months of its financial 2020 I calculated the company net income to be negative $295 million. This was during the pandemic year when revenues for the video game industry boomed and the Switch had its best year on record in the U.S. This also included the revenues from the release of the PS5 and Xbox Series consoles. Its losses over the last 3 years could exceed $1.5 billion. It has closed over 400 stores with hundreds more planned, laid off thousands of employees and re-calibrated its core business back to new games as the used game market is drying up. These losses are not coming from a realignment of its business segment. The losses are a result that the video game market has significantly shifted towards digital. The most worrying aspect of the GameStop business is that there is no master plan to reverse the losses. Unlike Amazon which carried on trading after a decade of not making a dime in profit, there is no grand vision for the company. The GameStop management are carrying on like its 2008 with no strategy of how to make physical game buying more appealing than digital downloads. Their business strategy (described below) is to aim for better logistics and a streamlined web store. They seem to be crossing their fingers and hoping for the best. That is GameStop’s future. Praying for the good old days when physical software was king.

Wall Street smelt blood. They saw that GameStop was an injured company, struggling to make ends meet as digital game sales, subscriptions and other online webstores gained ground. The share price for most of 2020 fluctuated around the $4 mark (at one point it fell to a low of $2.80), down from a previous high of $62 back in early 2008. It was $4 for a reason. Long term investors lost faith in the company’s ability to grow out of its troubles and become profitable. How can it when its main revenue stream has shrunk so sharply? More bad news could only mean it’s share price would continue to fall. So, the hedge funds bought into GameStop with one object in mind – shorten it. Over a third of GameStop stock was bought by hedge funds in a bid to shorten the stock. What could go wrong?

Well, they under-estimated the power of the internet and community forums. People are angry. People want revenge. People want to “stick it to the man”. It was ordinary people who either had a soft spot for GameStop, or felt sorry for them, or they found the perfect way to subvert the hedge funds. They decided to gang together and buy, on mass, GameStop stock, in a bid to drive up the price and ensue a panic, a “short squeeze”. It worked. Like all things when it comes to the stock market it is exceedingly difficult to pin down exactly when the mad rush started. GameStop stock price started to head north into the teens from $4 around November, most likely in anticipation of the financial results with the release of the new consoles. The stock price shot up about two weeks ago to $30. This week it rocketed to a high of $469 in days. The price started to fluctuate all over the place, yo-yoing from peaks to troughs. At the time of writing, it is now at $325 but this price will change a lot as this is a moving story.

This is stupid. This is blind horse betting. As Mike Pachter said, this now has the hallmark of a Ponzi scheme. The price can only stay this high as investors are ploughing in expecting the price to go even further north on the belief people will continue to buy the stock at higher and higher prices. How will this end? Badly. Reality will kick in and the stock price will reflect its verifiable market value again. That “correction” may happen sooner than you think, taking a lot of small investors with it. Ironically, it could even make those hedge funds, who held tight, even richer because a lot of these hedge funds have deep pockets and will sweat it out.

One of the unfortunate things about this whole idiotic episode is that the GameStop executives and board of directors who hold a lot of stock in the company probably sold them, making them an absolute fortune. The expression failing upwards has never been so relevant. They made a fortune despite the fact they are presiding over a failing company and they have shown little to no imagination on how to reverse GameStop’s slide into oblivion. They became rich because they are failing. The increase in the share price is the lifeline the company needed. In fiscal 2019 it repurchased 38 million of its own shares at $5 per share. If it is quick it will offer a Dutch auction of its stock and put it back on the market, converting some of that paper money into real money. Remember none of this is because they did anything well or clever. They got access to a huge pot of gold because paradoxically investors lost faith in them.

This current high share price is due to the fact ordinary investors wanted to subvert Wall Street. They did not buy into GameStop shares because they thought the company was doing anything well. Most of them probably have never read any of GameStop financials or understand how precarious the company is in, they just wanted to play games with hedge funds, but that is a really dangerous game. When reality kicks in, and it will kick in sooner or later, a lot of small investors, encouraged to buy into the stock after it has risen in price by several hundred percent will be burnt the greatest. The fundamentals to keep the stock high are simply not there. Wall Street knows it. The hedge funds know it. GameStop is not Apple nor is it a start-up. It has a long history of reacting slow or sticking its head in the sand in the face of digitialisation of video game buying.

At the end of the day the hedge funds have only themselves to blame but the sad fact is that the stock price volatility of GameStop, the bets and counter bets with the stock price, the riches made, the losses incurred, nothing of this has to do with video games. GameStop is a pawn, as is AMC Entertainment, Koss Corp and BlackBerry, and other struggling companies which have recently seen sharp increases in their stock prices. It is an oxymoron. It is a contradiction. It is all about betting, but like visiting a casino, for many, it will all end in tears.

[Wrathbone]

Anyone who makes substantial investments based on a Reddit trend does not deserve to make that money back.

[Mantis]

No but I think that's the point. It's a huge gamble, and I think there are just as many throwing money into the pot as a means of sticking it to the hedge funds as those looking to triple their life savings.

It'll all end in tears eventually when people start cashing out, the hedge funds will get what they want eventually. Who knows where the cap will be though, somewhere close to the $1k mark I reckon. The hype on their subreddit makes for quite amusing reading though, I think it's kind of brilliant how they've created this viral community of protest investors.

[Raid]

I think the most surprising thing to come out of all of this is that no matter how many idiots guides to what's happening I read, I still don't understand how any of this bollocks works. The stock market may as well be run by wizards.

But the thing is that those wizards are being exposed for the arrogant arseholes that they are; officials have been on national broadcast news in the US claiming that they're manipulating the market to protect themselves and all of their rich wizard friends. Manipulating the market in this way is, so far as I understand it, very illegal. The Robinhood app has independently suspended sales of the Gamestop stock effectively trying to prevent certain buyers from accessing it.

But Mantis is right; the hedge funds will win, they always do. A few ordinary people caught up in the hype will be ruined because they've used significant portions of their savings to attempt to stick it to wall street, but the hedge funds will have bet comparatively tiny fractions of their money on the gamble. Maybe a few of those ridiculously high paid managers will lose their jobs. It's a protest, just like Occupy Wall Street was, and while it's a more interesting angle, I'm willing to bet it'll be just as ineffective in the long run.

[Achtung Englander]

correct. People are betting against the house and the house always wins. There will be some winners but there will be plenty of losers who can least afford to lose

[Animalmother]

Having listened to multiple explanations of this I think I understand what happened...but I find stock market tomfuckery even more confusing as a consequence :/

[Hatredsheart]

Having listened to multiple explanations of this I think I understand what happened...but I find stock market tomfuckery even more confusing as a consequence :/

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[Snowy]

Cheers, I understand that now