GameStop: The Rise of the Retail Investor
Legendary early 20th-century investor Jesse Livermore once remarked:
“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in thestock market todayhas happened before and will happen again.”
Though I largely agree with Livermore from a market psychology perspective, what occurred in 2020 with the meme stock craze was genuinely unique. The COVID-19 pandemic and “stay at home” policies sparked a new generation of retail investors. These retail investors took to message boards on Reddit (RDDT) to coalesce and orchestrate one of the largest short squeezes of all time in beaten-down video game retailer GameStop (GME).
Parlaying Meme Status into a Massive Cash Hoard
Despite deteriorating fundamentals in the underlying company, retail investors that piled into the stock forced large, intuitional, fundamental-focused investors to cover their shares. Meanwhile, retail investors continued to pile into GME and other meme stocks like AMC (AMC) and Virgin Galactic (SPCE) with their fresh stimulus checks. Eventually, shares tumbled from a high of $121 in 2021 to ~$10. Usually, the story of a “pump and dump” would end there. However, what is different about this story is that GME management was wise enough to conduct multiple stock offerings at nosebleed prices. Meanwhile, another short-squeeze in 2024 would allow management to unload shares at high prices again. Thanks to GME management’s savvy decision making, the company enjoys a balance sheet that boasts more than $4 billion in cash.
Image Source: Zacks Investment Research
With its new cash stack, GME can leverage it into real-world improvements in the business and pay off debt, make strategic investments, or acquire new businesses.
Short Interest and Technical View
Roughly 9% of GME shares are sold short. Meanwhile, the stock is breaking out of a monthly bull flag pattern. The combination of a large cash hoard, technical breakout, and high-short interest is a recipe for a run into year-end.
Image Source: TradingView
Earnings are a Catalyst
GameStop will report earnings on December 4th. Last quarter, the company swung to profitability, and over the past four quarters, GME has delivered an average surprise of 67% above Zacks Consensus Estimates.
Image Source: Zacks Investment Research
While a return to profitability is bullish, GME earnings themselves are unlikely to boost the stock. That said, what management says in the conference call about its massive cash hoard is likely to move shares and may end up being a significant catalyst to spark a short squeeze.
Bottom Line
The meme craze sent GameStop soaring. While shares have come down, management parlayed the hype and built a cash-rich balance sheet that can be leveraged moving forward.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
