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Who knew that GameStop, a small shop in a shopping mall in the 1980s, would make headlines in 2021?
Let's look into GameStrop, this short-selling issue that has seen its stock price plunge and its stock price soar.
A strange story about video game vendors caused a surge in stock prices in January 2021 through Reddit's popular site, Wall StreetBets. It is a war story thrown by an individual investor on short selling. Controversy over short selling has intensified since the new year in January 2021.
Gamestop stocks were the battlefield where individual investors, led by Reddit in the U.S., fought against the short sale of large hedge funds. There was an incident in which individual investors bought the shares in large quantities and caused the stock price to soar. The reason for this lies in institutional investors' short selling schemes.
What is short selling?
- Short selling is called short selling in English.
- It means selling what is missing. First, they borrow and sell stocks, and in the future, they buy stocks and trade them back.
- It is a way to borrow and sell stocks, and when stock prices fall later, it buys stocks cheaply and pays back profits.
* Naked short selling: Borrowless short selling. It is to sell shares that are not held first on the book and then buy them before the payment date comes and return them to the borrower.
* Covered short selling: Borrowed short selling. It is to borrow stocks from Korea Securities Depository and securities firms and sell them in advance based on them.
- In theory, the maximum profit from short selling is less than 100%, but the maximum loss is infinite.
GameStop - Is it a victory for individual investors over short sellers?
Reddit-fueled GameStop stocks are creating a frenzy.
GameStop shares, which soared to $347.51 on January 27, 2021, closed at $92.41.
Due to the GameStop scandal, financial regulators are urging the U.S. stock market to review decades of order flow and payment practices.
Keith Gill, who is YouTuber, led the rebellion of individual investors. He led the resistance to the Hedge Fund, which was a game-stop game on Reddit, while broadcasting YouTube under the nickname Roaring Kitty.
New York hedge fund managers Richard Marshall and Brian Gornick began buying GameStop shares in September 2020. The 10-dollar share price soared to more than $400 and posted nearly $700 million in profits in January when dust settled.
The sharp rise in GameStop stock prices is being introduced as a victory for individual investors over institutional players.
As individual investors found out that more than 140% of GameStop's total stock issues were short selling, the amount that short sellers had to pay back was more than they could borrow. At this level, we can see that there is already an excessive level of short selling.
Under these circumstances, stock prices soar if stockholders gather to prevent them from selling stocks, and if they continue to show a buying trend when supplies come out, they reduce the distribution of stocks. This could put short sellers on the verge of bankruptcy because they could not pay back their borrowed shares even at a much higher price.
"If you raise your stock price by buying all the shares of a company that is short-selling, short-sellers will be hit hard." - WSJ
As the stock price of GameStop soared, Robin Hood, an online free stock trading app, restricted trading of GameStop, AMC, etc.
Other securities firms, such as E-Trade and Interactive Brokers, took similar measures, which led to a greater loss of individual investors who failed to trade.
Who is GameStop?
GameStop is an American video game distributor that sells games, consoles, and other electronics. It has more than 5,000 stores in the United States, and can be found between doughnut shops, American shopping malls, and makeup retailers. GameStop, headquartered in Grapevine, Texas, recorded $6.4 billion in sales in 2020, but recorded $470 million in losses.
As of 2020, the company has 30,000 employees and operates more than 5,500 stores in 14 countries around the world.
It started in 1984 in Dallas, Texas, under the name of Babbage, an educational software store. It grew into a business selling popular video games that could be privately managed by Atari and Nintendo Systems, which was acquired by Barnes & Noble in 1999 for $215 million. In 2002, GameStop was listed at $18 per share, up 12% on the first day of trading.
Afterwards, GameStop spun off from Barnes & Noble as an independent company in 2004, and immediately acquired EB Games for $1.44 billion. Through this, the company moved out of the U.S. market to Europe, Canada, Australia, and New Zealand. Furthermore, with the acquisition of GeekNet, we extend our scope to collectibles and novel item businesses.
However, it is not even companies that are new and interesting now.
Over time, it has lost popularity with gamers who once stayed up all night waiting for the release of new consoles and game consoles. Currently, the foundation that maintains the game stop is a power-up reward loyalty program with 60 million members, but it is unknown when the subscribers will leave.
In the market, which is switching to online games, GameStop still relies on offline distribution, and its annual net profit has deteriorated significantly from $43 million in 2016 to $35 million in 2018. In fact, 2020's performance has worsened due to Corona 19.
GameStop's stock price rose from $4 in August 2020 to $20 in mid-January. The reason for the rise in stock prices was that Ryan Cohen, founder of Chewy, a pet product company, joined the GameStop board of directors, which was expected to improve his constitution.
Stocks surged to as high as $483 as a campaign against short selling began.
Gamestop Competitive Situation
The overall video game market is exploding, and the epidemic has accelerated as Americans stay home. GameStop must be economized with platforms such as Xbox Live, PlayStation Network, Nintendo eShop, and online game platform Steam. At least it doesn't seem to win. Now, all gamers play games by download or online in real time.
Amazon is also trying to enter the cloud game field with a new streaming service called Luna. Retail discount stores such as Wal-Mart, Best Buy and Target are also expanding their offerings.
What's your relationship with Reddit?
Reddit is a social news website. It is called a combination of read and edit. If you register your writing and other users vote up or down, it will be on the main page according to the ranking.
The first person who recommended buying GameStop stocks at Wall Streetbets, a stock forum of Reddit, which is popular among U.S. private investors, is YouTuber Keith Jill. Numerous individual investors participated in the event as individual investors posted a message that they would crush the short selling force.
Online securities firms have almost zero fees. The way these companies earn profits is to buy stocks, sell them to people at a little more expensive, and earn price gains. This is because it is less likely to suffer losses against individual investors than on the stock exchange.
Individual investors have entered the stock and option market in 2020. Recently, stocks such as GameStop have soared due to writings instigated on Reddit and other social media platforms.
Then why is it short-selling?
If you expect a fall, you will benefit as the price of stocks that you have to pay back to short sellers who borrowed and bought stocks falls.
GameStam's stock price of $100 to $300 does not fit the company's value at all. So one day, the stock price will go back to around $10 or $20. Therefore, short selling forces are speculating about the falling stock price of GameStop. If short selling forces start selling short selling, individual investors will suffer huge investment losses if they are forced to cut their hands at a bargain price.
The GameStop case has become a heated debate over the ban on short selling, which can only be done by institutional investors who benefit from it.
GameStop Stock Flow
The situation at the game stop, which will be recorded as a resistance to short selling, seems to be coming to an end. The short-selling war is likely to end in tragedy. Individual investors' funds have been flocking for several days, but stock prices have fallen by more than 80 percent compared to their high points. This is because individual investors who suffer from high points will eventually suffer losses.
Then let's look at the stock price. Its share price was around $20 per share on January 11, 2021. This amount has risen from four dollars, so this amount is also highly valued.
The shares rose to $350 on January 27, 2021 and $468 on January 28, 2021. Since then, dozens of game-stop stocks have shown signs of jumping.
A closer look at the stock price from late January to early February shows that the stock price is gradually falling, showing great volatility as shown below.
Gamestop's management performance has created an amount of stock that can never be seen. Although some individual investors may unite to raise stock prices in the short term, temporary responses alone will not beat the volume of short selling in large quantities.
According to the news, the gathering of individual investors was the highest level ever, and it is also a case of crisis by causing huge losses to short sellers. Eventually, they had no choice but to dispose of other stocks in order to pay them back, causing stock price adjustments not only in the United States but also in other countries' stock markets.
GameStop Business Performance
Based on business performance, stock prices can never soar. Since 2018, both net profit and sales have been falling, especially losses have been accumulating. GameStop has been pretty tough for two years and is expected to continue to suffer losses.
In an effort to change the business structure of GameStop, Ryan Cohen (the founder of Chewy.com), a former pet supply company, was added to the board. Since then, GameStop's shares have risen as Cohen has purchased about 10 percent of the company's 9 million shares. Cohen says GameStop will sell games at offline stores and shift its focus to digital sales, e-sports, and virtual games.
| ($K) | TTM | 1/30/2020 | 1/30/2019 | 1/30/2018 |
| Revenue | 7,334,900 | 6,466,000 | 8,285,300 | 9,224,600 |
| Net Income | -270,000 | -464,400 | -794,800 | 34,700 |
They are expected to make efforts to transform GameStop's business model into a technology company that provides digital experience, and investors are looking at whether they can remain a video game retailer and shake up the online ecosystem.
GameStop has closed more than 1,000 stores since mid-2019. It also adds PC games, computers, monitors, game tables, and game TV to its sales list. However, it will take some time for this transition to pay off. Some should also consider that Cohen's experience in leading online pet shops may not apply to the game business.
Will the war on short selling continue?
In January 2021, AMC, Bed Bath & Beyond, as well as the explosive growth of GameStop stocks, fell for a considerable period of 2020, but the rise was noticeable around January 27. It is another example of resistance to so-called short selling by individual investors.
Another game stop incident could occur as an online platform where individual investors can increase their investment and participants can share information.
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