Game Stop

GameStop (GME) is the world’s largest retail game outlet. They operate Brick and Mortar stores all across the US. GameStop stock rallied around 3500% between 13th January 2021 and 28th January 2021. The rally in the stock price was primarily the result of a war between Wall Street hedge funds and group of retail traders that operate in a subreddit “wallstreetbets”. These group of traders are individuals who take big bets on the market and casually discuss their portfolios and trade setups on the platform.

The Rally in GameStop stock can be explained in two phases:

The First Phase:

The initial rally was steady and was the result of speculation from the Wallstreetbets traders. The reason for this speculation was because of Ryan Cohen, The CEO of Chewy. Chewy is a well- recognised pet food business. Their business model is online retail. Ryan Cohen Bought a large chunk of GameStop stock about 12% automatically being the majority shareholder. A few of his colleagues also bought the stock. Now, because Chewy operates an online retail business model, Wallstreetbets speculators realised that if Ryan Cohen applied his expertise of online retail for GameStop it could indefinitely boost profitability for the company since most sale of video games for major consoles happen online.

Another major factor is that the Video game business operates in cycles where a new cycle begins when major video game console players like PlayStation and Xbox release their latest versions, boosting game sales and sales die out when the market becomes saturated. Since players like PlayStation and Xbox have already announced their new models the PS5 and Xbox series X, It is the beginning of the next cycle and hence the time is ripe for GameStop to make a move. About 3 million participants of Wallstreetbets started rallying the price because of these factors. But they also realised another factor from their analysis and that is major institutions like Melvin Capital have taken big short positions on the stock shorting more shares than the amount floating in the market, this leads to phase 2.

The Second Phase:

Major hedge funds like Melvin Capital had large short positions on the stock as the stock seemed bearish according to their analysis. As the scrip was rallying because of Wallstreetbets traders these hedge funds had incurred major losses and received margin calls from their brokers. The margin call induced forced buying of the stock from Wall Street adding a tremendous amount of buying pressure. This phenomenon of excessive buying pressure generated due to forced buying to square off short positions is called a Short Squeeze. This incurred millions in losses for the hedge funds as they were buying back their positions at skyrocketed prices due to buying pressure induced by the short squeeze combined with the buying pressure from Wallstreetbets traders. Another factor that added even more buying pressure is that many traders were buying option calls. So, option sellers in order to hedge their positions were also buying GME stock this practice is called covered call. The overall combined effect of the long positions by Wallstreetbets, the short squeeze and covered calls by option sellers rallied the price upto 3500% in a matter of two weeks.

GameStop Corp. operates as a multichannel video game, consumer electronics, and collectibles retailer in the United States, Canada, Australia, and Europe. The company sells new and pre-owned video game platforms; accessories, including controllers, gaming headsets, virtual reality products, and memory cards; new and pre-owned video game software; and in-game digital currency, digital downloadable content, and full-game downloads, as well as network points cards, and prepaid digital and prepaid subscription cards. It also sells collectibles comprising licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes.

The company operates its stores and e-commerce sites under the GameStop, EB Games, and Micromania brands; and collectibles stores under the Zing Pop Culture and ThinkGeek brand, as well as offers Game Informer, a print and digital video game publication featuring reviews of new title releases, game tips, and news regarding the video game industry. As of February 1, 2020, the company operated 5,509 stores across 14 countries. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1996 and is headquartered in Grapevine, Texas.