In early 2021, a struggling video game retailer, GameStop, ignited a financial firestorm. Fuelled by a social media-driven surge in retail investor activity, GameStop’s stock price skyrocketed. This was a direct challenge towards the Wall Street institutions and sparked a global conversation. Fast forward to 2024, GameStop has seen a slight resurgence and is back in the spotlight. Has the company undergone a true transformation, or is this just another cycle of hype for GameStop resurge? This article delves into the past and present state of GameStop and hopes to identify key lessons for retail investors to learn from.
1. Introduction of GameStop (GME)
GameStop is the world ‘s largest video game retailer worldwide with over 4000+ stores across US, Europe and Australia. Since the mid-2010s, the gaming landscape has witnessed a dramatic shift. The rise of digital downloads offered consumers a more convenient and often cheaper alternative. Instead of visiting a store, players could purchase games directly from online platforms like PlayStation Store, Steam and more. As a result, this drastically impacted its revenue due to lost sales and reduced revenue streams. The convenience of digital downloads eliminated the opportunity for impulse purchases at the checkout counter by customers.
2. The GameStop Frenzy: 2021 Short Squeeze
The combined effect of declining physical sales due to Covid-19 and the trend towards digital downloads left GameStop in a financially precarious position. The company’s core business model, built on selling physical copies of video games, was under increasing pressure. This caused its share prices to steadily fall by 2021.
Short positions became a widespread play in 2020 by both retail and institutional players as many companies face potential defaults. GME (GameStop) was one of many stocks in which hedge funds took interest in placing heavy short positions on. At its highest, GME had more than 140 percent of short interest to shares available for trading. This also meant that some shorted shares had been re-lent and shorted again.
This drew attention from the Reddit community, particularly the group known as “WallStreetBets.” This community is known for discussing meme stocks and high-risk stock transactions. The high short interest in GME further piqued their interest. Many members believed that GameStop was significantly undervalued and explored the idea of a short squeeze. This meant driving the price to the point where short sellers had to buy shares to cover their positions at large losses.
By rallying retail traders and influencers like Roaring Kitty, GameStop’s stock price began to soar. This highlighted the power of collective investment. Social media-driven movements played a significant role. Enthusiasm grew, and more investors joined, further driving up the stock price and intensifying the short squeeze. GameStop’s stock price soared from under $4 in early December 2020 to an all-time high of $86 by the end of January. This is akin to David taking on Goliath and resulted in many hedge funds like Melvin Capital to suffer significant losses.
3. GameStop Resurge in 2024?
However after the hype and all, the GameStop share prices also started to subside back to the 20-30s over the past 3 years.
In May 2024, “Roaring Kitten” the famous social media finance influencer returned to X.com after a three year hiatus. He posted a sketch of a man leaning forward, which is a meme that indicates things are getting serious. Many retail investors took that as a sign of another resurgence and the GME share price surged nearly 75% within that single day. However will this be a repeat of the 2021 saga or is this just a moment of hype?
4. Current Financial Situation of GME
Many may wonder if GameStop’s financial situation has improved after three years. If so, does this recent stock price spike present a good opportunity to invest? Let’s take a deeper look into it.
From a revenue perspective, GameStop has experienced declining or stagnating revenue since 2021, maintaining annual revenue of $5 billion. The only bright spot is that its negative EBIT has been improving in the last 12 months. However, with a market cap of about $9 billion, the current share price seems expensive. It is neither a dividend stock nor does it have significant growth prospects to justify its price. There are better and more affordable stocks at this current point to consider rather than GME stock.
5. Conclusion in GameStop Resurge
The GameStop phenomenon offers crucial lessons for retail investors. It shows the power of collective action and the importance of risk management. For long-term investing, GME stock may not be ideal due to limited growth and no dividends. However, as a high-risk bet for GameStop resurge, it might appeal to some investors. Personally, I prefer to take a back seat and observe this entire fiasco at the side if it repeats again.
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