GameStop — it’s the story that’s been dominating the airwaves from evening news programs to comedy shows. The saga has all the makings of real-life gambling and revenge money scheme flick come to life: rich vs poor, average people taking on “the system”, karma, and yes, even memes. Just what is going on, and what’s going to happen?
The Stock Market
With such a breaking story, there are a lot of videos explaining what’s going on. Here are a few:
If you need a further breakdown or aren’t the type to watch videos, here we go.
As you probably know, there are two types of companies: private and public. Private companies are generally owned by a limited number of individuals. Public companies may have hundreds, thousands, even millions of owners. That’s because public companies say, “Hey, if you give me some money so I can pay for new merchandise, new equipment, and whatever else we need, you can own a part of the company and have a say in what we do!” This proof of ownership is a stock. Companies can always offer up more of these stocks to raise money, or they may limit the number to prevent too many people from having a say in the business. How much that stock is worth is based on supply and demand — and some luck.
Think in terms of an eBay auction: if people are excited about the company, you will have multiple people trying to outbid each other on a listing (e.g. a piece of stock). If the item (company) has a bad reputation or there are so many of stocks out there, average sale price will be low and/or go down. Where you go to buy these stocks is the stock market, although you generally through places that have easy access to any stock you want (brokers) for a fee. Colloquially, “the stock market” refers to a collection of averages for certain publicly traded companies, like NASDAQ, but these are technically called market indexes. Individuals generally buy stocks because they think the company will grow in value, so that a stock they paid for will can be sold in the future for more money — i.e., buy low, sell high.
Since the stock market is made up of businesses, it has often been thought of as stock price is high = must be doing something right = lots of people are buying from/using the company’s services = people are spending = economy is good. Unfortunately, it often seems like that is not the case, such as in the current case of the stock market still setting record highs despite unemployment being well above normal levels. This disconnect has been a common grievance among the general populace, such as the Wall Street vs. Main Street or regular people vs the elite slogans and catchphrases.
But again, while market indexes have been setting record highs, not every company follows the same flow. As I’ve talked about in my column, GameStop has been having a rough time. There’s the COVID-19 pandemic of course, but GameStop also faces stiff competition from other stores (Amazon, Best Buy, Walmart) and digital game purchases which skip traditional retailers completely. But propelled by general stock market optimism and new board members from the site Chewy.com, the stock price (listed as GME) in early 2021 was going for around $17 after being under $5 in late summer and early fall of 2020.
The Rapid Rise
If you bought a GameStop stock for $5 and sold it for $17, that’s a nifty profit, and the basis of the stock market, right? But groups of people working together in what’s called a hedge fund were trying to also make a profit on GameStop but in an almost counterintuitive way — borrow low, return even lower. Let’s go back to an eBay example. You know a certain item — say, an anime box set — is going for above MSRP on eBay. You also happen to know your friend has a copy, and you believe there’s going to be reprint coming soon. So you ask your friend to borrow it, sell it on eBay, and now have the money from the sale. You manage to buy a copy at MSRP, and you return that copy to your friend. Even if you throw in a tip for holding on to it for a while, you’ve made a few extra bucks. In terms of stocks, that’s short selling.
But let’s say another friend borrows that set from you and they sell it. Now you need two copies — one for the friend you originally borrowed it from and one to the person you sold it to. In the stock market, you can technically sell shares that don’t exist, just as you and Friend B are operating on the fact the new shipment hasn’t happened yet. If that new shipment comes through, everyone’s happy!
…But what if that new shipment’s MSRP goes up — way, way, up? As in, a group of anime lovers decide to join together and buy all the new reprints, leaving only the eBay copies in the market and the occasional set one of them decides to sell? Both you and Friend B have already guaranteed your buyers a copy, so you turn to eBay to fulfill your obligations — Friend B owes you a set, which you can use to send to your buyer, but you still need a second for Friend A. But since now you are forced to buy on eBay, you and Friend B may have ended up paying above MSRP to avoid the wrath of your buyers and Friend A. So you two have lost money.
That’s basically the GameStop situation. Users of the forum WallStreetBets on Reddit realized hedge funds were purposely betting on GameStop’s failure and were short selling its stock. So they decided to buy GameStop stock so that the price would rise.
And rise it did. While these hedge funds were probably hoping they could acquire GameStop shares for about $10, maybe be force dot take a loss at $20 a pop, shares were suddenly going for $50, 60, $100, $150, even up to $400! Take a look at GameStop’s stock prices over the past year according to Google:
And see at its journey since the beginning of 2021:
In the past year, GameStop stock was selling for less than a price of a pack of soda in most places. And yet in the past month, it was trading for almost $500, although it didn’t close for that high. Still, many individuals — including this 10-year-old boy — were suddenly walking away with thousands of dollars in profit.
This meant at least one hedge fund went bankrupt since they didn’t have enough money to fulfill their debts now that GameStop’s stock was so high. At least one stock platform, Robinhood, decided to not allow any more trading of GameStop. This was met with much criticism, as a rallying cry for the stock market and enterprise is to let the free market decide. In addition, some viewed it as a way to protect the hedge funds from losing more money — which goes back to the Main Street vs. Wall Street/regular vs. elite societal complaints. Robinhood backtracked in part for GameStop and other stocks r/WallStreetBets were targeting like AMC Theatres and then later in full.
The Current Situation
As of this writing, GameStop has dropped in value to around $63, which is just above its previous peak of about $62 in late 2007.
So just to emphasize, its pre-2021 high was before the Obama-Biden ticket, Bitcoin, and Groupon. Yeah, that was a while ago.
The WallStreetBets subreddit temporarily closed to the general public, but plenty of posts around the web urge (in Reddit/web lingo) to invest in GameStop “stonks” so that it reaches “to the moon”. There are also threads telling people to stop selling and to hold fast.
It’s hard to separate bored trolls from fervent believers, but analysts are mostly pessimistic about its stock prices in the future. Billionaire Mark Cuban said to hold if possible but probably wouldn’t recommend buying more. Reasons include GameStop not having any current plans for changes and the rise of the digital marketplace, things that have been haunting them for years. Before the surge started, according to MarketBeat via Capital.com, the media stock price prediction for GameStop was $12.50; even the highest estimate was $33, well below the current price.
The Future and Lessons Learned
Even beyond that, there’s the question of when this will happen again. And it will, even though some are trying to head off Redditors at the pass. The only thing that could prevent such a thing is changing the rules, but, well…
Warning: strong language!
So this isn’t a new strategy; it’s just relatively new that average people could do it. Of course, “average” is somewhat skewed — even with 2 million users, that’s only a fraction of the US population. In addition, even coming up with the money to buy any stocks, even the cheap ones, is a challenge for many people. So is having the time and technology to know when to sell.
While lawmakers are looking at the GameStop situation, there are also two issues with that. One, COVID-19 is still the priority. Two, even though some prominent Democrats and Republicans have expressed anger at Robinhood and/or the general system, actually coming up with and passing changes is another. Will rules be enforceable for everyone, angering investors who have spent years making profits off of short selling? Or will regular people feel aggrieved again and feel like rules will be different for individuals vs hedge funds, just as the common complaint of one rule for corporations and another for individuals?
Hidden and Not-So-Hidden Costs
Now, I admit I’m not much of a gambler. The only thing I gamble on is whether a video game special edition is going to go out-of-print or not. Now, does it make me sick to think about if I had scraped together a few bucks and bought some GameStop stock back when I made this post — or even at the beginning of the month — I’d have a few thousand dollars now? Yeah, of course. And am I some big defender of “letting the free market decide” or have a favorable view of Wall Street in general? No. Hedge funds and later private equities hastened the decline or even doomed Toys R Us and Sears/Kmart for instance.
I’d be lying if I didn’t enjoy the image of David vs. Goliath, average citizens versus millionaire and billionaire investors. That being said, not all hedge funds are using money from Scrooge-like individuals. About 7% of state and local pension money for public company workers are in hedge funds, including Eastman Kodak employees, state workers in Michigan and Virginia, and teachers in California.
Of course, that’s only a part of their retirement savings portfolio, and it’s unlikely their money was connected with Melvin Capital, the now-bankrupt firm, or other hedge funds connected with GameStop. Still, there’s a risk the next Internet user-boosted stock could be — whether from Redditors, Facebookers, Instagrammers, whatever.
Now that people know this is a way to “stick to ‘the man'”, there are going to be others who try to copy the Reddit/GameStop formula. Copies usually don’t work as well as the original in things like this (like AMC Theatres or Bed Bath & Beyond not climbing as much), yet who knows. The GameStop stock is unlikely to rise again, but it could be because it got too much attention. But even a $17 (where it was a few weeks ago) to $55 (current price) would be quite a spike, and fetch some nice return on investments. If social media can propel a 224% increase on other stocks, that still is a nice profit.
However, the stock fall means that Redditors have lost a lot of money. One user bought shares at $80, sold at $94, then bought more at $300. Those shares he still has, but right now, he is losing almost $250 a share.
That’s always a risk in a stock market, but the pandemic, high unemployment, and the peak price means it’s likely more people will try to get on such a bandwagon, and there’s a chance they’ll lose money they shouldn’t be spending or otherwise don’t have. If one of the biggest Redditors who invested in GameStop lost $13 million, it’s not an easy get-rich-quick scheme others can replicate just after seeing the news.
Final Thoughts
All in all, this is more like a social experiment. And, without getting too political, what I think it proves is that reform is needed. Even with GameStop bringing on experienced executives and games being a popular way to pass time in the wake of the pandemic, they have some serious issues as a business. Of course, the rise of digital is a problem, but there are little things that make no sense. Like, how in 2021 is there no way on the website to just filter merchandise by a store?? Well, I guess what do you expect from a chain where what’s on display may not be available but you could also be missing out on something you want…
Still, it’s good that at least some people are emotionally invested in GameStop. Sure, a lot of the Reddit investors just saw an opportunity, but with some bad headlines over the years including the recent PS5/Xbox Series X|S ordering disaster, it’s nice to see people rooting for the chain. At a time where so many businesses are struggling, it’s always a feel-good story to see people rally around one. But if for those who want GameStop to succeed, propping up its stock price only goes so far; they need to buy GameStop’s merchandise stock. Besides former Chewy executives, GameStop is also adding people from Amazon Web Services and QVC, so perhaps this new board can make it easier to buy from GameStop, and then the financial stock will rise — and not because of an organized gamble.