Why GameStop Will Cost Retail Investors Billions

How it Began

The main stream story of GameStop is of a group of redditors from the subreddit “WallStreetBets” grouping together and coordinating an attack on Hedge Funds due to these redditors noticing a substantial short position on GameStop. While it makes a nice story the real reason GameStop rose is much more intricate.

Ryan Cohen

Ryan Cohen is a relatively unknown entrepreneur, but I would say he is the one who truly started the GameStop stock rise. When Ryan was 25 he started Chewy an E-commerce pet shop, which grew and was purchased by Pet Smart for over 3 billion dollars, the largest E-Commerce buy out in history. Ryan without a doubt is an E-Commerce genius and saw unseen potential in GameStop. In December of 2020 Ryan Cohen purchased a 12% stake in GameStop and wrote a letter to the executive team providing insight on how they can dominate the E-Commerce landscape (https://www.bloomberg.com/news/articles/2020-09-21/top-gamestop-investor-wants-to-turn-retailer-into-amazon-rival). This resulted in Ryan Cohen being added on the board of directors of GameStop and was the launching point of the meteoritic rise of GameStop. With Ryan Cohen, GameStop no longer was a speculation but was legitimized as a potential E-Commerce giant. This caused mass investor interest and the start of the mother of all short squeeze or otherwise known as the MOASS.

MOASS

To understand what a short squeeze is we have to understand the concept of shorting a stock. When an investor is shorting a stock what they basically are doing is selling the a stock at the stocks current price and buying it back at a later day to cover there initial sell. Lets say we have a fictional company Stonks, Stonks currently sells at 100$ a share, I believe it will go down next month so I short 10 shares of the stock. A month passes and Stonks is now worth 50$ a share, I know must pay for 10 shares I sold last month meaning I made in total 500$ (sold 10 shares at 100 and then bought 10 shares at 50).

2008 Volkswagen’s Short Squeeze

Eat the Rich

On Thursday, January 28th, House Representative Alexandria Ocasio-Cortez live streamed talking about what was going on with GameStop with Reddit Cofounder Alexis Ohanian and Finance Twitch streamer TheStockGuy. During the almost 90 minute stream AOC and her guests recapped what has been happening as well as the social implications. Specifically, a new social sentiment was formed from the rise in GameStop. People began seeing buying GameStop stock as a way to get back at the mega rich. Buying GameStop and forcing Hedge Funds into a short squeeze will result in vengeance for financial atrocities like 2008. People began posting emotional stories of buying GameStop stock after there mom lost her job or their dad got his home taken away. GameStop is no longer about making money its about crushing institutions and letting the little guy get a piece of the pie.

Volume Traded

Over the last trading week of January from 25th to 29th, GameStop trading volume has been massive! With about 700M stocks traded within those few days, have GameStop as the most traded stock in the last week.

GameStop Historic Volume and Stock Price source: https://marketchameleon.com/Overview/GME/DailyCharts/
GameStop Volatility source: https://marketchameleon.com/Overview/GME/DailyCharts/

Uncoordinated Emotional Trading

As stated above to accomplish a short squeeze, a large number of share holders must hold the shares until the short sellers will come needed to buy shares to cover there position. Many people may think this but unfortunately the people at WallStreetBets are not an organized trading group, they are a group of individuals all with there own individual trading accounts and beliefs.

GameStop is not Worth 10,000 a Share

I know this isn’t shocking but the GameStop’s shares are not worth close to what is being seen currently in the market. Both earnings per share and sales have dropped since 2019 (https://money.cnn.com/quote/forecast/forecast.html?symb=GME). Yet the stock is up over 1000% year to date, and although I believe Ryan Cohen can change GameStop, I do not believe his influence justifies 1000% increase.

What’s Going to Happen Next

This is the part I am not looking forward to, I hope by this point you realize GameStop and current investors are in a dangerous position. If not I’d like to point out one more important factor, institutes who bought in early 2020 and 2019 hoping to short squeeze hedge funds have already exited as shown in the graph below.

GameStop Institutional Ownership source: https://fintel.io/so/us/gme
GameStop Compared to other Meme Stocks source: https://www.investopedia.com/sec-monitoring-stock-price-volatility-as-gamestop-shares-soar-5101012

Why I’m Writing This

To give a bit of a background, I was a GameStop Believer, I bought in at around 30$ a share in early January and kept buying in till about 60$ a share. I truly believed Ryan Cohen would turn the company around and that we could do a short squeeze and I’d MAYBE double my money. What has happened now is as Michael Burry stated “Insane and Dangerous”, on January 28th after listening to AOC’s stream, I stayed up the entire night researching everything I have stated above and more. After a night of coffee fueled research, I realized how dangerous this game is and had closed my entire position on the market open of January 29th.

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