GameStop: A Story of David Vs. Goliath

Photo: Clay Banks

By: Kevin McHugh

If you haven’t heard, GameStop (GME) has not received this much attention since Halo 3 was released in September 2007, the year GameStop recorded its previous highest price per share of around $62. Last week, GameStop reached a new record-high price of $347. 

So, what exactly is going on with GameStop? Why has its stock price skyrocketed? And just who is behind the whole ordeal?

If we are looking at pure fundamentals, GameStop has some major problems as it reported a $471 million loss in 2020.  Do we really think GameStop is going to be the future? As New York University Finance Professor Aswath Damodaran said on CNBC, “Is there anybody who thinks that we’re all going to go back to malls and that GameStop is going to come roaring back or that AMC is going to come back as a movie theater business for the future?”

However, what is happening with GameStop, and with AMC for that matter, far exceeds fundamentals. It is not about profitability or long-term viability, it is about revenge.  This is a classic David Vs. Goliath moment in stock market history. A group of inexperienced yet energized traders were one step ahead of hedge fund “experts” who shorted the stock by more that 140%.  That’s right, more shares were shorted than there were shares that actually existed. 

What exactly is “shorting?” Essentially, shorting a stock means you think the price of a stock will drop. If you short a stock and the price drops, you make money; however, if the price increases, you lose money. In GameStop’s case, most investors bet against it and for valid reasons.  

But why has the price of GameStop been rising? The short answer is because of supply and demand. As people hold onto outstanding shares, the price goes up because more people are buying and less shares become available. The more complicated answer is that as more people buy GameStop and less shares become available, the price will continue to rise, and hedge funds will be forced to cover their losses and pay an exorbitant amount of money to free them of their shorted positions. This is why trading apps like Robinhood are attempting to limit trading, because to them market manipulation is only ok when it’s not done by the general public. 

There are some who think GameStop could reach $1000 per share.  This requires faith that everyone who has holdings in GameStop will hold it until the price reaches the moon, but as history tells us, people are fueled by fear and greed.  The fear is that GameStop will crash at any minute and people would rather not lose the quickest $100 they ever made, so they sell as soon as they turn a profit. As individuals buy and sell, the price will surely fluctuate, but at the end of the day, GameStop, as it stands, is a failing company and its stock price is bound to crash down to reality.

Most individuals will lose money and the hedge funds will make money when GameStop crashes back down to its natural price, probably below $50.  As for now, the GameStop saga continues. It will be interesting to see how long people can hold the line, but remember, the house always wins.

Kevin McHugh writes from Baltimore where he is an M.B.A. student at The University of Baltimore, received his B.S. in Finance from The University of Baltimore, and is the founder and CEO of Bloombox.

*This article is for informational purposes only and does not intend to replace professional advice.  It is important to consult with a financial planner and conduct your own research before investing.

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