Let's dissect the insane saga of the GameStop stock to understand how a company that’s been steadily declining for the past 5 years became the hottest stock of 2021, making ordinary people millionaires overnight and taking down billion-dollar hedge funds in the process.
It’s no secret that GameStop hasn’t been a great company in a long time. They’ve become less relevant and announced in December 2020 that 1000 stores would close by the end of March 2021. However, their stock says a different story. On January 11, 2021 it was trading at $20 per share but on January 27, 2021 it climbed past $400 per share. The start of the frenzy can be traced back to September 2020. That’s when Ryan Cohen, founder and CEO of the e-commerce pet company, Chewy, bought a 10% stake in GameStop through his investment firm, RC Ventures LLC. Cohen sold Chewy to PetSmart in 2017 for $3.35 billion.
The GameStop stock started climbing due to Cohen’s experience and confidence in the company, doubling to about $10 per share between August 2020 to September 2020. On November 16, 2020 RC Ventures sent a strongly worded statement to GameStop’s board of directors outlining flaws in the company’s strategy. This paragraph that was bolded and underlined in the letter sums it up well,
"GameStop’s leadership should immediately conduct a strategic review of the business and share a credible plan for seizing the tremendous opportunities in the rapidly-growing gaming sector. GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences – not remain a video game retailer that over prioritizes its brick-and-mortar footprint and stumbles around the online ecosystem."
The board of GameStop must have agreed with Cohen’s proposed strategy because on January 11th, 2021 he was offered a seat on the GameStop board of directors. Their stock doubled from $20 per share to $40 per share in the days following the announcement. At this point, the GameStop stock was still one of the most shorted stocks on the market. That means hedge funds were waging billions of dollars that GameStop would fail as a company. Little did they know that their bets on GameStop failing would be the very reason it succeeds.
This is when the Reddit thread, r/wallstreetbets came into the equation. They were formed in 2012 by Jaime Rogozinski. Jaime is a 39-year-old IT consultant living in Mexico City with a wife and kids. He started r/wallstreetbets for investors to share advice who were willing to treat the stock market more like gambling with the hopes to make it big or lose it all. They grew to 1,000,000 members in March 2020 during the selloff of stocks spurred by COVID-19 and have since grown to over 10,000,000 members.
While r/wallstreetbets was the rocket used to take the GameStop stock to the moon, Keith Gill, a 34-year-old marketer from Massachusetts, was the captain. He started his investments into GameStop in June 2019 because he believed the stock was undervalued. Gill started posting “GameStop yolo updates” to r/wallstreetbets in 2019. He reportedly bought $53,000 in call options in June 2019.
Keith Gill's GameStop yolo updates got around 5,000 to 7,000 upvotes. However, his update on January 13th, 2021 received 49,000 upvotes after his gains increased over 1000% and he gained $2.7 million in a single day. When Wall Street Bets realized that they could band together to inflate the price of the GameStop stock, cause hedge funds betting against the stock to lose a ton of money, and reap huge gains when the hedge funds were forced to buy their shorted stock shares at a higher price, they waged war against these institutional investors. The most prominent name that retail investors are trying to take down is Melvin Capital. Gabe Plotkin, who started Melvin Capital once stated,
“We have a lot of analysts, we require a lot out of them.” The team has modeled more than 500 companies in “significant detail,” while a data science group reads into trends.”
The one factor they didn’t consider was a large group of ordinary investors that were sick and tired of hedge funds like Melvin Capital having so much pull in the price of stocks. The rise of the GameStop stock was incredible. It went from $43 per share on January 21, 2021 to over $400 per share on January 27th, 2021. It was fueled by Reddit, TikTok, Discord, and the second richest man in the world, Elon Musk. Musk somehow manages to blend in with the average investor as he joined in on discord conversations and tweeted “gamestonk” on January 26th, propelling the stock price even higher. Elon has had his own bouts with Melvin Capital as they were one of the most prominent short sellers of Tesla. He sold Tesla short shorts for $69.42 when he finally defeated them and now he was able to throw one last punch at his doubters. It’s reported that hedge funds have already lost nearly $20 billion as of Friday, January 29, 2021.
We’re not done yet. The hedge funds are trying any way possible to make this out to be anything but legal. Their arguments generally stem from the fact that these ordinary investors are pumping GameStop's stock with the malicious intent to destroy them and not because they think GameStop is a strong company. That is probably true, but not illegal. Regardless, on Thursday, January 28, 2021 Robinhood and other trading platforms stopped people from buying shares of GameStop and other highly shorted stocks that we’re soaring up as people tried to find the next GameStop. They allowed people to only close their open positions which caused stocks like GameStop to plummet from upwards of $400 to $128 per share. Retail investors lost millions as people panic sold their stocks which allowed hedge funds to gain back a small chunk of the money they had lost.
It gets interesting when you look at the relationships that these large companies have with one another. Robinhood led the pack when it came to restricting trades on these heavily pumped stocks. It’s important to note that Robinhood doesn’t actually make stock transactions, they just facilitate them. After you place an order on Robinhood, it gets routed to a 3rd party to execute. Over half of Robinhood’s orders get routed to a company called Citadel. Citadel infused $2 billion of cash into Melvin Capital to help alleviate the losses they’ve taken on GameStop.
Many people have speculated that Robinhood was pressured into restricting trading on these stocks by Citadel since Robinhood needs them if they want to continue operating successfully. That would force the stock prices down and Melvin Capital and Citadel would both benefit. Both Robinhood and Citadel have denied these claims. Since allowing traders to buy GameStop stock again, it rose nearly 70% on Friday, January 29th to close at $312 per share. Robinhood has had dozens of class action lawsuits filed against them in the day following the trading restrictions.
Robinhood’s user agreement states:
“Robinhood may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”
The man who spurred it all, Keith Gill, now sits on $31,471,000 in profit.