It has been a wild ride for Game Stop (EB Games in Canada) over the past couple weeks. This is a company with 5509 retail stores and like many retail stores has seen a huge hit in lost revenues to the tune of over a billion dollars during the 2020 Covid pandemic as people cannot shop at stores and digital gaming continues to cut its grass. Although game lovers still love to pick up a physical copy from time to time many gamers have long thrown shade on the company suggesting it may end up going the way of Blockbuster. The stock price of GME has fallen from a high of nearly $55.00 in 2015 to $4.00 by June 2020. Like many stocks, in July of 2020 GME began to see some uptick to a somewhat respectable high of almost $20.00 per share by January 12, 2021 (Chart 1).
Chart 1 – GME stock price prior to run up
The declining stock price in the last 5 years should come as no surprise. Revenues of GME have dropped over $3 billion per year since late 2014 to January 3, 2021, just before the pandemic closures began to occur.
There are many other reasons why this company ended up priced where it was by the end of 2020. On the one hand, it had a fair amount of cash on hand and video games are popular. This was what originally led the Reddit #WallStreetBets poster Desmund Delaney to suggest that GME should be put on the radar last year and ultimately take credit for the run up that just occurred. Even he admits that he was laughed at then and for good reason. The company’s debt level had become enormous and their Debt to Equity Ratio had risen 128% over the past 5 years. Cash is barely enough to cover payables, the company is currently not profitable and nobody really knows what effect Covid will have on its long term future.
A couple of weeks back, I started to notice that many of the investing boards I follow began talking about GME, AMC, BB, NOK and a number of other fairly lackluster and boring companies. I have held both BB and NOK in the past and sold my shares after years of flatlining or declining stock prices and boredom.
At first, the responses by other investors to those hyping GME were the same as Delaney received last year. Then the amount of chatter increased significantly and before long you could sense that there was some serious hype going on. The words “troll”, “bot” and “pump and dump” were heavily used on all the boards I participate in. The strategy initiated by WallStreetBets to convince retail investors to band together seemed to be working. By January 21 the stock price had run up to $61 USD. Premarket trading on Monday the 25th saw the stock gap up to over $80 and it bounced around and spiked again to eventually close on the 26th at just over $200 USD. This was quite a feat for a band of retail investors to drive up the price of GME. The short sellers were already screaming about their billion dollar losses but remained defiant and holding.
And then enter Elon Musk.
Adjusting for time zone differentials it seems as though Musk waited until the end of the trading day to tweet this. Musk has been blamed, criticized, praised for influencing the stock market a number of times and no matter which way you come at this claim, it has serious impact for all involved.
GME Stock Price Driven Up by Short Squeeze & Retail Investor Trading – After Market Tuesday January 26, 2021
Chart 2 – Pre Tweet (well close enough to the tweet)
GME Pre Market Stock Price – Thursday Morning January 28, 2021
Chart 3 – Post Tweet period, $456.50 USD by 06:00
It is no secret that Musk is also a hater of short sellers. Whether you agree with this 400 year old practice or not would make fodder for great debate but just so we can be clear on where Musk stands we can find evidence in some previous tweets.
Most people who understand a little about the stock market know that the simplest goal is to buy low in hopes that they go up in price. This is speculating that the stock price will improve. In the past, this really depended a lot on how good those who ran the company were at doing their jobs and how they fared against their competition. Short selling is the opposite. People took a look at the company and thought that the people working at the company were actually bad at their job and/or their competition was going to outperform them. They speculated that the company will decline and with it, the stock price. Both parties are speculating and neither really knows which way things will go.
Why does Musk hate short sellers so much? Who knows really but if were to speculate, it may be because he owns what Forbes called back in July of 2020, the most hated and short sold stock.
Many analysts also say it is a hugely over valued stock and “value” is what Musk says short sellers destroy more than anything. What is value? Huge topic but here it seems to mean more than technical analysis, more than money but potential.
In Musk’s defense, whatever you think has been driving Tesla’s stock price to Mars recently has really stuck it to the “haters” and short sellers have lost billions on betting against the unprofitable electric car company this year alone. What drives Musk? Is it ideology or is it money or ego? Many believe it is ideology and that retail investors have propelled Tesla to become over valued and Musk to be the richest human to have ever lived on our planet. Musk has long said he does not care about the money and it is all about getting people to Mars.
This trend of believing Musk is out to save the world seems to go back some time already. It is easy to spiral down a rabbit hole on this one. Maybe Musk is the world’s saviour, maybe he is not.
It appears that retail investors really can make a difference and move the needle on a stock price. The digital era is flipping traditional structures of investing on its head. Many platforms exist where individuals can sit at home during a Pandemic and invest or gamble their money at very low commission fees. Message boards provide immense value to DIY investors but there are also a large number of false leads that are being attributed to “pump and dumpers” dragging people into a stock with FOMO and then leaving them holding the bag.
Elon Musk has the power to move stock prices all by himself. In May 2020, Musk tweeted that he thought Tesla’s stock price was too high. It seemed a little odd but nonetheless the stock price had fallen 12% within 30 minutes of the tweet. Musk’s tweet was above board though because he had cleared this with the SEC and his lawyers back in 2018 after settling with a $20 million fine.
Maybe you do not believe one person can single handedly affect stock prices? Here are some other recent examples of Musk’s tweets driving up stock prices.
It was fairly obvious to many after the first initial run up of GME that Musk’s tweets had a huge impact on further gains of the stock price. Note the position of GME prior to Musk’s tweets (Chart 4).
GME First Sell Off by Run Up Investors
Chart 4 – Stock Price drops to $265.75 USD by 17:30 Thursday January 28, 2021
Again, accounting for time zone changes, in comes Elon Musk.
GME Pre Market is Wild again Friday January 29, 2021
Chart 5 – Stock price hits a high of $430.00 USD by 04:30
The volatility Friday morning would be enough to give any DIY investor a heart attack unless they have nerves of steel but short sellers on Wall Street woke up crying Uncle. Was Musk involved before 3:08 pm on January 26? It is difficult to know but from that point forward, his tweets did a fine job in helping him exact revenge on those he hates thanks to an opportunity some investors found in a boring, shorted company called Gamestop.
Was this a triumph for the little guy? A just fall from grace of the greedy Wall Street investors? Maybe it was both and maybe it was the world’s richest man taking it out on an age-old investing strategy that continues to threaten and offend the value Musk sees in Tesla? One thing is for sure that this event had an ironic twist. What was said to be a war against Wall Street actually managed to propel one of Wall Street’s darlings, Ryan Cohen who coincidentally became a board chair on January 11 and had purchased $9 million in shares last September, into the Billionaires club.
Maybe it was all just dumb luck and timing but as I write this, GME is down $103.46 USD / 31% again to $225.00. At its 52 week heigh of $483.00 USD, Bloomberg noted that Gamestop was more valuable than 90% of the US companies listed on the Russell 3000 index.
Written Monday February 1, 2021
This is just a fun piece of observation of last week’s GME craze and in no way supports any conspiracy theory or any side of the debate. It is just an observation of the facts and timeline as I see sitting from the sidelines watching people laugh and cry.