Gamestop (GME) for dumies
Gamestop (GME) for dumies

GME (GameStop Corp) is a US videogame retailer company. They sell "physical" video games CD/DVD/BlueRay/Cartridges for consoles and PC. They're also well positioned in the used marked.

Gamestop Fundamentals

GameStop is considered "the Blockbuster of video games", and while this Blockbuster succumbed against digital delivery and streaming (Netflix), it is getting smashed by Digital Delivery (Seam, Origin, PLayStation Store) and Cloud Gaming Stadia (Google), PlayStation Now, Luna (Amazon). Do you believe that a Millennial/Zoomer will buy a physical copy of a videogame in 2021? I don't think so...

If you take a quick look at the fundamentals of GameStop, even without being an expert in fundamental analysis, you will see that this company is sinking. Everything in deep red! The weird thing is that the failure of their business model was clear since at least 4-5 years. What were they doing while videogame distributors were growing their digital platforms like Valve Steam, EA Origin, console manufacturers (PlayStation,Microsoft,Nintendo) stores? They were distributing unsustainable dividends (>10%)! So, GameStop was(is?) a company heading toward the cliff at high speed, with no intention of hitting the brakes

THE STOCK PRICE

The 2020 came, Pandemic hit its business model even more (physical stores locked down) and the stock hit a bottom of $2.57 per share in April 2020. That's it, that's how it ends for a dead business model, cantered around obsolete physical products, slashed by a prolonged lockdown. But if you take a look at the stock price... surprise! It's 135x since April! GameStop Market Capitalization went from 180 Millions on April 3rd, 2020, to 25 Billions at the time of writing (Thursday 28/1 morning) and it may not be over yet! With that market cap, it's ready to join the SP500.

WHAT IS A SHORT SQUEEZE

There's a short Squeeze going on at the moment, a very peculiar one. Shorting a stock is the act of selling something you don't have right now, and buying it later to cover the sale. It's a bet that the stock price will go down. Shorting is dangerous, because the downsides are unlimited. So, what's a Short Squeeze? If a company is heavily shorted, short sellers face the risk of not finding enough stocks on the market to cover their short positions. If the shortholders "agree" to not sell the stocks, the price coould skyrocket. (here is a video explanation from investopedia: www.investopedia.com/video/play/short-squeeze/)

THE GAMESTOP SHORT SQUEEZE

On 13/1/21 the current stock rally took off, eclipsing Tesla, Bitcoin,Nio and other Meme Stocks/Assets. Around the same time, DFV updates became daily, and they got A LOT of attention. 58,000 Call Options, portfolio value 22.8M (18M in options, 4M in cash). It's funny to see that the 800 options probably bought at various strikes prices. His portfolio went up $9M in a single day! $TSLA (Tesla Motors) has become a boomer stock.

Who's being short squeezed? There's an Hedge fund that was holding a lot of short positions into GameStop: Melvin Capital. WSB crowd got angry, and started taking it personally, fighting with all their weapons against this large hedge Fund. melvin Capital got out of the short squeeze accepting crazy stock prices and stomaching a hunge (undisclosed so far) loss. Apparently, the WSB crowd is going after other stocks that Melvin was shorting, just for the fun of destroying the fund.

BOTTOM LINE

I don't know what's going to happen today and tomorrow. The main "enemy" got out, but the stock is still keeping its price. Most likely the battle is over and the castle of cards can now crash, causing the death of a shitload of call options. But.. all in all, it's a phychology battle, a game of luck and stubbornness, competely detached from the company business. With a share dilution and by putting more sstocks on the market the short sellers can fidn an easier way out - but the company willl get a lot of cash, which in turns may resurrect or reinvest their business. It could become a self fulfilling prophecy! GameStop can act like SPAC, in a kind of huge pivoting!

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Nathan George

Blogger and Influencer

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