The GameStop Saga – Show Notes
Hello and welcome back to SimpleMoney podcast
I’m your host Matthew Siwiec – also known as the Friendly Financial Coach.
On today’s episode we cover the GameStop saga and pick it apart to see what’s actually happening behind the curtain. This is a pretty hot topic and I received a few requests to decipher what is going on.
It’s so hot that Netflix and MGM are already in discussions to make films about the situation.
To first understand the situation, we need to look at the main stock at the centre of the debate – GameStop. Other stocks have been involved but this is the one receiving the most attention.
GameStop is the worlds largest retailer of video game, consumer electronics and interconnected products in the world with approximately 5,500 retail locations.
The company started in Dallas, Texas in 1984 as Babbage’s and quickly took advantage of selling the hot product at the time – Atari 2600 – the 8-bit wonder revolutionized home videogaming by putting a arcade in a home. Further successes for the company were found with the Nintendo and other systems.
Over the next few decades there was a chapter 11 bankruptcy, acquisitions, and more until Feb 12th, 2002 when GameStop had their IPO at $18 USD per share.
Shortly after this, they bought the retailer Electronic Boutique – aka EB Games – which is the name that would be most familiar to Canadians.
Then business was all fine and dandy until 2016. At this juncture, competition from online game retailers like the Microsoft and Playstation store started to dent sales. This drop in business can also be seen in their stock price.
Recent lockdowns due to COVID-19 further affected sales by temporarily shuttering their retail locations. During 2020, the share hit low points of 3 to $5. At this point, the share is also catching the attention of many retail investors who see this as an undervalued stock that has a lot of potential.
Short Selling GameStop
And this is where the recent GameStop drama really begins. Many large financial companies took short positions on GameStop. It was reported by Business Insider that at one point, 140% of all publicly traded shares were being shorted – meaning that there some shorts had be relent out.
Now short positions are a bit of a difficult financial concept to wrap your head around, but they are essentially the opposite of a regular trade where you buy shares and hope that the price goes up.
On the other hand, a short position is when a company borrows shares to sell them before they buy them. Then, they then need to buy back those shares at a future date to replace the shares borrowed.
The hope here is that they will sell them at a price that is higher than they are worth at the date that they buy the shares back.
Basically, they are making a negative bet that the share price will decrease after they’ve made the sale.
During this period of time, the company that lent their shares to the short sellers will also be charging them interest. They also require that the short seller keep a deposit with them to help partially guaranteed the borrowed shares.
Historically, short-sellers are not held in the highest regards as they are betting against the market. They often will try to publicly discredit companies and attack the vulnerable.
Now, the short position is considered to be one of unlimited risk. This is because in theory a share price can rise to any amount before they have to buy it back.
The term used in the financial world when a stock price is increasing past the short sale price is called a short squeeze. The squeeze also builds on itself when short sellers buy the shares to close their short position – pushing prices up again.
Reddit Joins The Chat
As the short sellers were circling GameStop, a subreddit called WallStreetBets gained support of retail investors to band around GME – causing the price to absolutely skyrocket. To show the impact, the stock closed 2020 at a price of 18.84 and at it’s highest point hit$ 483.00 during intraday trading – a 2,363% increase.
A casual stroll through the subreddit showed that the main reason for this push was to stick it to Wall Street and less to make a profit. It was main street versus wall street.
This move did hit the heart of many large investment firms. We don’t know how much was lost by the short-sellers but some reports peg it at around 7 billion dollars and has caused a couple Wall Street firms to crash.
The next move was made by trading firms. Robinhood and TD Ameritrade halted the purchase of shares which sent the price of GME spiraling downwards. This move was reportedly made to protect retail investors from a volitive stock, but creditable claims are made that they were attempting to protect the hedge funds – especially since there is a direct relationship and generated a large amount of revenue from Citadel Securities.
This growing craziness brought the ire of regulators and government officials in the United States and worldwide. The White House, congress and security regulators were involved. Many Canadian regulators are also looking into the situation and WealthSimple also put warnings on volatile investments.
What’s Next For GameStop and Others?
As of recording this episode, the share price is floating under $60 and the posts on Reddit are full of people relishing in their losses. These investors knew that they would probably lose funds and many seem unfazed – even those that have lost 6 figures. Many of these people are still holding strong with Diamond Hands in their desire to spite Wallstreet.
A lot of great stories have also come out on this subreddit – including a fellow that sold some of his GME shares to buy Nintendo Switches and games from GameStop to donate to a children’s hospital. Others bought billboard space to champion their cause, someone paid for advertising in Times Square and someone even paid to have a planes fly around with banners mocking Wall Street.
It’s uncertain what will happen next, but it’s likely that the interest in GameStop will slowly dissipate and the share price will decrease. The price of the shares are clearly over priced and many professionals put it’s true value at $10 to $25 dollars.
The impact will also radiate into other areas – some good, some bad. Regulatory discussions are ongoing issue right now and all levels of US government are looking at the practices of Wall Street and whether any changes need to be made. Later this month, one of Robinhood’s founders will also need to testify in-front of Congress.
Janet Yellen, the new treasury secretary is also under intense scrutiny as she has been paid hundreds of thousands by Citadel for speaking engagements.
Beyond regulatory changes, the force of retailer investors has shown that they can be formidable and also unpredictable. A situation that will likely arise again.
Other components of the financial system may also be affected by the behaviour. Passive index funds that include GameStop and other affected shares have in some cases had to readjust their holdings to adjust for the growing market share of the stocks and Wall Street firms that had to make up losses may have liquidated other holdings to access funds which may also affect those prices.
Also already in the works are two films about this whole saga.
And that where the saga is right now. It’s been a crazy story so far and undoubtedly there will be more.
Link to current price of game stop