Why GameStop Will Cost Retail Investors Billions
The GameStop stock rise is without a doubt the biggest news story of 2021 and will no doubt be remembered as a historic event in world of finance. Although being portrayed as the retail investor uprising against evil market manipulating hedge funds, I believe from my own research we are on the brink of one of the largest losses in retail investor capital in history.
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.
During the 2020 pandemic many retailors suffered due to worldwide lockdowns, GameStop was no exception with 2020 Q2 net sales down 942M$ from 2019 Q2 (https://news.gamestop.com/news-releases/news-release-details/gamestop-reports-second-quarter-results-and-strong-progress). But even before the pandemic GameStop business was continuing to slow due to the death of retailors with the rising of E-Commerce. These consistent and the acceleration of online shopping resulted in many Hedge Funds taking huge short positions on GameStop.
With this huge short position going on institutional investors and extremely savvy retail investors (like reddit legend DeepFuckingValue) saw an opportunity for a short squeeze. In 2019 Dr. Michael Burry (the man who predicted the 2008 financial crisis) bought 3 million shares of GameStock (https://www.businesswire.com/news/home/20190819005633/en/). During 2019 and 2020 GameStop investors on the WallStreetBets subreddit were seen as fools taking a stake in another failing retail shop. Yet in Christmas 2020 one man made a choice which kick started this historic stock rise.
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.
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).
With respect to GameStop shorters had shorted massive amount of shares (As of January 15, 2021 61.78 Million shares are shorted https://www.marketbeat.com/stocks/NYSE/GME/short-interest/).
These shorters must eventually buy back the stock they shorted, and the idea of Dr. Michael Burry and reddit legend u/DeepFuckingValue is if people keep buying and holding GameStock shares the price will continue to rise and no matter the price, Shorters MUST buy back these shares eventually and if no one sells at a certain price, the price will theoretically keep going up until someone decides to sell. This exponential growth in stock price was seen in 2008 with Volkswagen, with prices almost reaching 1,000$ a share from 200$ in a few hours.
This Mother of all Short Squeeze belief is what causing some people to believe GameStop price could rise to 1,000$ a share and some hopefuls believing 10,000$ a share (making GameStop the most valuable company in the world). Resulting in the annihilation of Hedge Funds and the greatest transfer of wealth ever.
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.
Now I know I have stated a lot of things which most people probably know already. As well I have not provided one reason on why GameStop will not make retail investors money. I really want to make sure that there is context to what I will write next. During this next section I will breakdown why I believe GameStop will crash and how it will damage the retail investor more than any Hedge Fund.
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.
As stated above about 60 million shares of GME had to be bought back, this was recorded on January 15 with short interest (amount of shorts that need to be covered) being reported twice every two weeks.
What all this means is within the last week all of the original shorted stock could have been covered already meaning the MOASS has already passed. But if you go through put/call orders for the market over last week you will of noticed an immense amount of put options.
Meaning that most likely what is occurring is many Hedge Funds and Short Sellers have closed previous positions and are re-buying in. With these new short positions they have covered previous losses and as long as GameStop comes back down they will make money at the end of all this.
A key misunderstanding of the MOASS is that the short sellers will be buying back all the shorted stock in one fatal move. Instead stocks will be bought back off expiration date of contracts made, normally short sellers would stagger dates to minimize risk. As well with retail investors un-organized and no set “Sell Price” amongst them it is impossible to coordinate a move to have no retail investor to sell resulting in explosive exponential growth of the stock. Furthermore with insane trade volumes going through daily, GameStop short sellers have many ways to get out through the chaos. January 22nd GameStop had almost 200 million shares traded. Many people are comparing Volkwagen short squeeze to GameStop, on the day of the Volkswagen Short Squeeze 11.6 million shares were traded (https://finance.yahoo.com/quote/VOW.DE/history?period1=1201651200&period2=1230595200&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true). Yet with the sheer volume of GameStop traded recently short sellers have more opportunities to close positions than Volkswagen short sellers did
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.
What this means is it is impossible for them to all coordinate a wall to prevent short sellers from buying back there position. Furthermore with the cultural significance of this moment, many have shifted there mentality from making money to vengeance. Many people are entering the market for the first time to invest in GameStop or other “shorted” stocks to destroy Hedge Funds and get rich. People have moved there retirement funds to buy GameStop or used rent money or other financially insane choices because they believe they will take down the institutes that keep them down.
I genuinely hope I am wrong, I hope everything I wrote and everything I continue to write below is wrong. I hope average every day people will make money and that billionaire Hedge Funds pay for the damages caused through financial recklessness. But, unfortunately I believe everyone has been sucked into the high emotions of what is going on.
Ben Graham, the mentor to Warren Buffet mentions the dangers of emotional investing in his classic the Intelligent Investor. Emotions are what cause peaks and valleys in the market, but over time fundamentals will shine through.
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.
By looking at GameStop fundamentals a price target of around 13$ makes sense, with that being said eventually GameStop will come back down resulting in the short sellers taking a profit with the retail investor taking massive losses.
GameStop themselves realize that the company is not worth thier current price, since why are they not releasing more shares right now to raise capital. GameStop is about to under go a massive transformation to an E-Commerce powerhouse under Ryan Cohen’s guidance, but to do so obviously needs capital. Raising capital at all time high stock prices would make a lot of sense, yet the company realizes that eventually the stock will come crashing down and they could be liable for a law suit for taking advantage of investors in a “Pump and Dump” scheme (https://en.wikipedia.org/wiki/Securities_Class_Action).
Furthermore, lets say they do release more shares to raise capital, this will provide an easy way out for many short sellers to avoid the short squeeze.
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.
Even Michael Burry who was one of if not the first big names to aim for a short squeeze has stated what is currently on as “Unnatural, insane and dangerous” (https://www.bnnbloomberg.ca/unnatural-insane-and-dangerous-michael-burry-on-gamestop-rally-1.1554521). As well Ryan Cohen the catalyst for the insane price increase has stayed quiet during these crazy gain days.
At the end of all of this, some investors who got in and left at the right time will have made a lot of money. Hedge Funds will probably be more wary of over shorting a stock but will be financially alright. But the average retail investor in GameStop or any of the meme stocks that are also being shorted will see insane losses. To justify my click bait title lets do a bit of math. Let us assume that due to the recent market hype retail investors own about 20 million shares of GameStop. To be generous let’s say 50% of those investors have reasonable sell limits, and are able to get out before GameStop returns to its fair market value for simplicity lets say 13$. As of writing this the current GameStop share price is about 313$. So 10 million shares multiplied by 300$ gives us a loss of 3 billion dollars. As well this is with GameStop alone and what we have seen is other shorted meme stocks move with GameStop activities.
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.
I feel obligated to share my research and hopefully help others and hopefully lessen the blow on the retail investor. I truly believe February will have many more luxury car purchases and more suicides due to the rise and fall of GameStop stock.
If you are currently invested in GameStop please ensure it is money you are okay with losing. As well be sure to set reasonable Sell Limits, since if I am wrong and the MOASS does occur if the shares are filled before your sell price you will be left with nothing.
I genuinely hope I am 100% wrong and everyone makes a ton of money, but only time will tell.