Friday 1 March 2024

Outsmarted: Tech powered retail investors defeats Wallstreet in the battle over GameStop stock

By Radithebe Rammutle

Wall street hedge funds, Melvin Capital, Citron and others, rushed to close their GameStop short-positions as the share-price of the gaming retailer rose to a peak of $347,51 in January 2021 from a low of $12 in December 2020.

Oddly, this 2795,92% share-price rally was not driven by powerful market participants but by the often-overlooked retail investors armed with social networking technology and online trading platforms.

Keith Gill, who goes by the name Deep@#&*ingValue on Reddit, rallied other members of his Reddit WallStreetBet forum, to buy GameStop stock, igniting one of the unparalleled frenzies in recent times.

How did it all start? According to Forbes, this started in April 2020 when legendary Scion Asset Management (SAM) founder, Dr Micheal Burry announced that they spent $15 million to gain 5.3% of GameStop.

Dr Burry, a surgeon turned financial whiz, is well-known for his analysis of credit risks associated with Mortgage-Backed Securities (MBS), in the late 2000s. Based on this analysis he bought Credit Default Swaps (CDS) that eventually protected his investments when defaults on subprime loans became common place in the late 2000s.

However, his GameStop 5.3% stake purchase had nothing to do with CDS. This time around Dr Burry and his firm wanted the GameStop board to repurchase half of its outstanding shares. This would ameliorate the downward pressure on GameStop share that was threatening SAM?s investment.

The Hedge Funds short interest in GameStop were likely to exert downward pressure on its stock price.?Notably, as of July 31st, 2019, Bloomberg reports short interest in GameStop stock at 57,226,706 shares ? this is about 63% of the 90,268,940 outstanding GameStop shares at last report? wrote Dr Burry in his August 16th, 2020 letter to the board. According to the asset management firm the investor community was not confident about the prospects of GameStop and its management turnaround abilities.

Hedge Funds short positions on GameStop were founded in the many problems the gaming retailor experienced. The company is losing its market share to new market entrants that are leveraging online distribution channels instead of the incumbent?s current brick and mortar channels.

According to its latest financial report the gaming retailor has 3642 stores in the US and 5509 international stores. The total non-current assets were increasing steadily between 2015 and 2017 with a slight dip between 2017 and 2018 (-12%) followed by a 62% increase between 2018 and 2019. Yet net sales from these investments remained negative for the period 2015 to 2019 showing signs of recovery only in 2017/2018 financial year (see graph 1).

Despite its challenges GameStop was awash with cash. The estimated cash holdings of the firm amounted to $480 million and was authorised by the US Securities Exchange Commission (SEC) to repurchase $237 million worth of outstanding shares. GameStop investors, including SAM expected management to take this opportunity to counter the short interest in GameStop and bolster GameStop share price.

However, short sellers? bet on the GameStop stock price dropping was not materialising. The price continued to rise thanks to the undeterred retail investors armed with online media Reddit and YouTube as well as the trading platform Robinhood.

None of the professional Wall Street money managers and hedge funds expected to be outsmarted by retail investors. For Wall Street professionals retail investors lacked the acumen and experience to pull off a Wall Street coup?. But they did.

Rallying these retail investors was Keith Gill through his online post in YouTube and Reddit. In one of his YouTube post, just before the January 2021 GameStop stock rally, Gill said ?The GameStop thesis is super simple, but it?s often misunderstood. Everyone classifies it as a cigar butt and just moves-on, but it is more than that. Yes, the legacy business is up against some very real secular risks and new consoles coming out this year might be the company?s last hurrah. But this [is not] some horse and buggy ship. GameStop is an established uniquely positioned business in a thriving $150 billion dollar gaming industry?this is why GameStop is different, its financial puff is a legitimate opportunity to reinvent itself as a premier gaming hub?.

Gill believed that GameStop?s strong balance sheet, low credit risks, improved cost containment measures that will eventually drive profitability and management ability are important factors that could pivot the business into a thriving success once more. His followers on social media believed him and they bought GameStop stock. They profited and Hedge Funds lost their bet.


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