After the market closed yesterday, GameStop (GME) released earnings. That will have brought on a burst of nostalgia for many who follow the market, but it also raises an interesting question. GME reported significantly less of a loss than anticipated and gave somewhat bullish forward guidance, so could it be that the video game retailer will go from meme stock to moneymaker? From lovable loser to a profitable company whose shares have more than novelty value?
January 2021 was a heady time for retail investors. It was a time of massive short squeezes, most notably in GME, which rose from below $5 to over $120 in less than a month. In fact, if you go back a little further, the jump was even more impressive as GME was trading below $2 in Q3 of 2020. We were told at the time that that move was engineered by a group of individual traders and investors who punished excessive short selling by Wall Street. Yay for us! The little guy was finally hitting back! It was an internet based thing, driven by a subreddit called WallStreetBets, and GME became what is now known as a “meme stock,” a stock whose price is driven by a group of small investors rather than by big, established Wall Street traders.
Research has subsequently shown that it wasn’t that simple. A lot of the buying that forced out the shorts was done by hedge funds and institutional traders who weren’t a part of the short fest, but most of that seems to have come after the initial squeeze was put on by the folks at WallStreetBets using the leverage offered by options to take oversized long positions in the stock. For all that Wall Street got involved later, the meme stock story from early 2021 is still one of the little guy challenging Wall Street orthodoxy -- some would say stupidity -- and winning.
Other companies were also the targets of similar moves at the time, from AMC Entertainment (AMC) to Blackberry (BB) and Bed Bath and Beyond. In those cases, the number of shares held short had also become ridiculous. Maybe it didn’t reach the 140% of the float that we saw in GME, but still was large enough where a short squeeze (pushing the price up, forcing those who borrowed shares to sell short to buy them back) was viable. It seemed back then short selling had gotten out of hand, and some stocks were hugely undervalued as a result, but subsequent events have shown that, in most cases, there really was a reason these stocks were valued at the place they were. Once the squeeze was over, both AMC and BB fell to levels that were actually below where they were when the buying started, while Bed Bath and Beyond went bankrupt.
That, however, isn’t the case with GME. Their stock has fallen from the crazy highs, for sure, but still closed yesterday at $18.75, significantly higher than before the whole meme mania began. The thing is, GameStop used their newfound popularity to their advantage. As was the case elsewhere, some insiders cashed out, of course, and they did issue more shares while the going was good. However, the current price indicates that was all absorbed without completely crashing the stock, and the signs from this earnings report are that GameStop used their windfall wisely.
They aren’t profitable yet, but with costs now better reflecting their addressable market and with favorable trends in the business prompting an outlook for a good Q4 and therefore holiday season, they should be soon. That would be remarkable turnaround and, in many ways, a vindication of what WallStreetBets and others did two and a half years ago.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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