What’s happening with GME? Should you Buy or Stay Away
Today, we’re going to talk about GME.
What exactly happened with GME? Why did everyone suddenly start talking about it? Where did all of those articles come from? Should you be buying, selling or holding? What comes next?
Just as a quick disclaimer: I was planning to cover GME, as soon as things quieted down a bit. But, since there seems to be a lot of interest, I decided to go over the situation as it is right now. I am sure that the situation will continue to evolve (and probably already has by the time you are reading this blog), but this will have to do for now.
The GME Situation: A Quick Rundown
A couple of big hedge funds looking to short GME stock. People online noticed this and decided that they aren’t on board with the idea. So, they created a … “movement” of sorts, where all the members of an investing subreddit (called Wall Street Bets) decided to go into the stock. And if these were just a couple of individuals, nothing big would’ve come out of it. However, they managed to get a lot of support online for their idea and all of a sudden, the stock price skyrocketed.
And when I say “sky-high”, I really mean it. On January 13th, GME stock was going for 31.40 dollars. January 27th, it was up to $347. The hedge funds were looking at massive losses.
Now, I’m sure that you’ve all seen plenty of articles and social media posts talking about it, both by newspapers and publications and by individual unaffiliated users. The majority of posts presented the entire situation (and specifically the actions of the investors who were trying to bump up the price) in a very negative light. There were articles and statements, shaming them for “intentionally hurting the economy”, people calling them names, the major publications going all out with wild predictions … more or less the full course meal.
Most of my long-term subscribers have heard me say “never trust the media when it comes to investing” and this situation is the perfect example to illustrate my point. But more on that later. Let’s get back to the numbers.
Right now, the stock is plummeting back down (we’re currently looking at 53.50 dollars per share). If this is the first time you’ve looked at the price chart for GME in the last month, you’re most likely sitting there, wondering how this is even possible. Well, don’t worry, because I’m going to go over it in detail. You can also check out my other blogs such as Artificial Intelligence Stocks Investment.
GameStop – History & Financial Situation
GameStop (ticker symbol GME) is an American gaming retailer. They sell video games, gaming accessories & merchandise and consumer electronics.
- Current Price: $53.50 (today change -38.91 (-42.11%))
- Market Cap: 3.731B
- EPS: -4.22
Bear in mind, the chart isn’t exactly great at representing the massive spike in detail, because it happened really quickly. Also, just as a quick note, despite the drop, the stock is still worth a lot more than it was six months ago – it went from trading for as little as 4 bucks to the 53 dollars it is worth today. Additionally, if you look closely, you will notice that the price started going up even back then:
- For August 2020, the price went up by 44.28%
- In September, it was up by 52%
- September was a bit slow with just 2.65%, but in
- November, it went up by again by 58.17%
The stock was already pretty low, and as soon as some positive news came around, long-term investors got interested. The holiday season also treated GameStop well, since a couple of gaming consoles came out.
For Q4 of 2020, GameStop enjoyed increased store sales by 4%, while online sales went up by more than 300% (due to lockdowns).
However, their business was slowly declining for years, as gamers (and especially the younger generations) are now opting for digital purchases. In 2020 alone, GameStop closed 462 stores, adding up to a total of 783 for the past two years. As a result, their revenue growth for Q4 was still negative, despite the relatively strong holiday season.
Now, as you can probably tell, I’m not much of a gamer myself. However, all of this seems to follow the general trend of digitalisation. It’s the same with most other entertainment industries – people prefer buying their books, music and movies digitally, rather than going down to the store to grab physical copies.
But why don’t we let the stats do the talking instead?
In 2009, 80% of game sales were physical, and only 20% digital. Only nine years later, in 2018, the market situation was reversed, with 83% of sales being digital, leaving a measly 17% of the share to physical purchases.
On top of that, we’ve also got the whole health thing happening right now, making people a lot less likely to leave their homes to look for a physical copy of their favourite game.
These factors resulted in a decline both in sales and in revenue for the past couple of years.
Is GME a buy? Am I buying GME stock? Should You?
I usually leave this for the end of the blog, but today, we’ve got some additional things to cover, so let’s just get it out of the way.
Taking into consideration all of the negatives that we already discussed, GME is not exactly attractive from a long-term perspective, because:
GameStop sales have been on the decline for years
- 2018: 9.2 billion dollars
- 2019: 8.3 billion dollars (-10% year-over-year)
- 2020: 6.5 billion dollars (-22% year-over-year)
- Projected change for 2021: 5.3 billion dollars (-18% year-over-year)
The profits-per-share projection also is looking … less than promising, with analysts expecting more than a 48% decrease over the next five years.
Additionally, you’ve also got the following factors:
- GameStop focuses on physical retail, which is rapidly losing ground to digital sales.
- GameStop was forced to close nearly 800 stores in the last two years alone.
- We’ve got a global health situation on our hands, which further discourages physical retail.
Even if we dismiss what the analysts think, the trends speak for themselves.
I do not see GameStop as a viable long-term choice, and I would not recommend purchasing GME stock to any long-term investor.
Besides, I don’t think that any of the people involved in the current situation looked at it from a long-term perspective.
A look at the full picture
Okay, now that we’re done with the stock analysis, let’s look at the situation from a different point of view. Don’t think like a long-term retail investor, think like a hedge fund manager.
What do you see here?
An opportunity. An opportunity to make a lot of money by shorting the stock.
Now, spreading fear and confusion about positions isn’t exactly unheard of. You can see it happening all the time on online forums, discussion boards, social media, and even in mainstream publications.
And sometimes, the people behind all this just so happen to be big players and/or hedge funds. If you happen to be such a big player, you can use the price drop to cover your positions and come out ahead.
Or, in other words, you can do the same exact thing that all of us are in the stock market to do:
You can turn your money … into a lot more money.
Now, some people believe that shorting is good, while others are convinced that it’s evil. Personally, I don’t like taking part in shorting, because it’s risky. And, as a long-term investor, I’m not on the Stock Market to play risky games. I won’t get into that aspect too much.
But, morality aside, there is one thing that does really come off as arrogant – the media’s attitude towards the retail investors who tried to counteract the short.
If it looks like a duck, and quacks like a duck …
“Duck test” – If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.“
And yes, I know that “manipulation” is a “dirty” word, but we’ve got to call it what is (hence my duck test reference).
If it’s “morally” okay for a hedge fund to make a drastic move like that and short a stock, trying to counteract it (by following the same ruleset), should be just as acceptable.
But, according to the dozens of articles that we’ve seen over the last few days, this just does not seem to be the case.
Now, I’m not active on Reddit, but it’s not like their community kept their side of the story a secret.
The investors in a Reddit sub-forum (called Wall Street Bets) noticed that GameStop was quickly turning into the most shorted stock on the market. The subforum is home to millions of traders, most of which use the Robinhood app (this will become relevant a bit later on).
So, these millions of traders picked up on what’s happening and started buying. But they didn’t just keep the information to themselves – they went out and shared it on social media and the internet as a whole.
And, just like that, millions of investors from all over the world started buying GME stock. Funny enough, many of them didn’t seem to be motivated by the idea of making money. Most of the posts that I came across make it seem more like a moral stance – these investors were angry at the hedge funds and wanted to use this opportunity to “get back at them”.
Well, it worked … sort of. For a few days, you had big hedge funds losing billions of dollars, because they were forced to cover their positions at a much higher price than anticipated. By January 29th, the Markets Insider reported that short sellers were looking at an estimated loss of nearly $20 billion. Of course, they weren’t going to give up.
The hedge funds continued with their shorting strategy and managed to make back a significant portion of their losses.
As of February 2nd, GameStop was still the most shorted stock on the market.
Before we continue, I just want to throw a quick note here, which will be relevant in just a moment:
The hedge fund that lost more than 50% of all their assets in January 2021 is Melvin Capital. Luckily, they got bailed out by a 2.75-billion-dollar investment, courtesy of Citadel.
So, this whole “losing billions of dollars” situation obviously didn’t sit right with the hedge funds. Something had to be done and fast. But the media had it covered.
Over these past few weeks, I’ve seen a lot of quite honestly hilarious articles making outrageous claims. There are publications out there, trying to bring politics into the mix (why do people feel the need to make everything political?) and articles claiming that “Redditors are moving to silver” (which is not true according to the WallStreetBets community).
The Discord Debacle
Another silly example is the whole Discord situation.
You’ve all heard Discord, right? It’s essentially a chat app, with similar functionality to Skype, but it also offers dedicated servers, and a ton of extra features, all in one neat, modern-looking package. Well, apparently the Reddit investing crowd had their own server that got shut down for hate speech of all things. I mean, I disapprove of hate speech as much as everyone else, but come on, this timing is just a bit too … convenient, don’t you think?
Oh, but it doesn’t even end there.
Hold on to your seat folks, because we’re getting to the funniest part. Forget bringing politics into the mix, forget the wild claims and accusations.
Robinhood and GME
This right here is “the good stuff”.
Remember how I mentioned that most of these Wall Street Bets investors were using the Robinhood app?
Well, the folks over at Robinhood decided to … restrict buying. They just went and flat out disabled purchasing. So, the only available option was to either sell or hold.
And what do you think resulted in?
Yes, that’s right, the price can’t go up, it can only go down. And yes, I am aware that Robinhood isn’t the only platform in the world, but it was the preferred platform for the most heavily involved community.
Is this starting to sound funny to you? Well, here comes the punch line.
Do you know Robinhood’s biggest customer is? Here’s a spoiler for you, their name begins with the letter “C”.
Yup, it’s Citadel.
What makes Citadel their customer, you ask? Well, they simply buy data. Robinhood tells them what the users are buying or selling before executing the transactions. Citadel gets the ability to act on this information before the retail investors can do anything about it.
Note: All of this is 100% legal. Neither Robinhood nor Citadel is breaking any laws here.
Now, of course, both Robinhood and Citadel have denied any claims of collusion, with Robinhood’s CEO flat out stating that he has not made any deals with hedge funds to halt or otherwise hinder the trading of GME stock.
Instead, Robinhood was forced to restrict trading because of the SEC.
Note: The SEC is a US agency, dedicated to combating market manipulation. They aim to protect the investors and the banking system.
And again – I’m not saying that Robinhood did something illegal because their user agreement already states that the company can restrict purchases at their own discretion.
Additionally, they actually eased up on the trading limitations after a while but were still only allowing up to 100 GameStop shares to be purchased. If you happened to already own this many shares, well, tough luck, because you just can’t buy any more.
Again, this prevented the stock from going up.
And to Robinhood’s credit, the restriction didn’t last all that long. Two days ago, the upper limit was increased to 500 shares.
Finally, as of today (February 5th), Robinhood officially removed the restriction on GME stock trades. Currently, users are allowed to purchase as many shares as they want, using the platform.
The biggest lesson that we can learn from this situation is the following:
Never, base your investments on the opinions of others. Especially if these opinions come from the media or the various financial publications.
And don’t get me wrong – I’m not trying to be overly negative towards the media here. They are a business. They will write headlines and publish the opinions that get the most clicks. As far as the Stock Market is concerned, this is just business as usual.
And, since we’ve already gone way past our usual time-limit, we’re going to call it for today. I hope that you enjoyed this blog and found it if not educational, then at least interesting. If you have any questions or ideas for future blog, don’t forget to leave them in the comments below.
For more detailed stock analysis and market discussion, make sure to check out our private investing group – we’ve also got a live chat, where you can contact me with questions and blog requests at any time.
Thank you all for watching until the end, and I’ll see you next time!
Recommended for further reading:
- Keys to Success – Napoleon Hill
- Secrets Of The Millionaire Mind – Harv Eker
- Shares Made Simple: A beginner’s guide to the stock market
- Smarter Investing: Simpler Decisions for Better Results
- Intelligent Investor: The Definitive Book on Value Investing
- The Five Rules Successful Stock Investing