Photo by Blogging Guide on Unsplash
A lot has been written about the group of small investors who encouraged each other on Reddit to run up the price of GameStop (GME) after realizing that hedge funds were "shorting" the stock (betting it would go down in value). As Alex Kirshnir explained in a recent Slate article,
Whether for profit or ideological reasons, the Redditors are winning. They’ve bought the hell out of GME, and short sellers have begun to abandon their positions en masse, leading the stock to go up even more as they buy it back. It’s a classic short squeeze. Melvin Capital was down 15 percent for the year on Jan. 22, according to the Wall Street Journal, leading the fund to take a $2.75 billion rescue package from other rich investors. On that day alone, short sellers against GameStop lost $1.6 billion, financial analytics firm S3 Partners said.
It appears that, as of today at least, the investors who were inspired by the Reddit thread have forced some firms to take big losses. Fortune's Jeff John Roberts reported that:
The tussle broke out earlier this month when retail investors on a Reddit social media forum began hailing GameStop stock as a winner even though the company seemed to be going the way of Blockbuster. This caused the share price to soar, leaving hedge funds who had bet against the stock in a short squeeze—forcing them to buy GameStop shares to cover their position, and driving the price still higher.
One thing that is certain is that, overall, GameStop lost money last year. The Motley Fool reported in December 2020 that GameStop that its online sales improved in November 2020, and that it was closing an additional 100 retail stores in an effort to cut costs.
Still, by September 2020 gamedaily.biz reported that:
In its quarterly financials, the company posted net sales of $942 million, down 27% year-over-year.
That would be staggering for any company, but in this case retail business had dropped even more dramatically due to the pandemic, which exacerbated the industry trend toward more online purchases of games.
In an opinion column today for Bloomberg, John Authers spectulated that:
Instead of greed, this latest bout of speculation, and especially the extraordinary excitement at GameStop, has a different emotional driver: anger. The people investing today are driven by righteous anger, about generational injustice, about what they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later, and about lacerating poverty and inequality. This makes it unlike any of the speculative rallies and crashes that have preceded it.
Authers may well be right, and certainly he has much greater knowledge of markets than I do. However, I do have two young adult sons at home. I can claim one small corner of understanding based on my many hours of standing around in GameStop stores while my sons weighed the merits of new games, or traded in their old games, or just chatted with the staff who were as geeked out about gaming as they were.
So, allow me to offer one additional insight to Authers' "anger bubble" theory. I believe at least some of the investors were also driven by loyalty to the brick and mortar GameStop stores that hold so many memories for the 15-25 year-old set. While not adapting rapidly to the online purchasing trends in gaming may have been unwise for the company, their customers do have significant affection and nostalgia for shopping in the physical stores. To be able to try the new game systems kiosks, trade in cartridges, ask for the free posters... it means something to them.
Anger over a lack of opportunity, corporate bailouts, and questionable Wall Street practices in general (pushing opioids for profit is one thing that comes to mind) may well be behind much of the small investor activism. To this I would add, don't ever suggest to a young man that gaming lacks value.