The Stock Trading Frenzy from Reddit
The inevitable shift from packaged video games to downloads is bad news for retail kingpin GameStop, but you wouldn’t know it from looking at the company’s stock price right now.
Shares of the video game stock climbed as high as $447 in after-hours trading on Tuesday, up from around $9 per share just a couple of weeks ago. The video game retailer’s stock price has seen a nearly 2,000% increase since the start of January. A year ago, it was trading under $4. On Thursday, it reached a high of $470 ― which is odd, as the increase has not been driven by astonishingly good performance on the company’s part. Rather, a bunch of Reddit users worked together to catapult the price, at the extraordinary expense of hedge fund managers.
But when the dust settles on this whirlwind of stock market drama, it’ll almost certainly have no bearing on GameStop’s actual business. Experts say that no matter where GameStop’s stock price ends up, it’ll ultimately remain a struggling seller of packaged video games whose turnaround plan looks like a long shot. That’s what makes this whole episode so bizarre to begin with.
“Nothing that GameStop has done warrants this,” says Michael Futter, a game industry analyst and founder of the consulting firm F-Squared. Even before the pandemic, GameStop was struggling to compete with a digital video game economy that’s made it easier than ever to download or stream a game without needing to buy a physical copy. As the pandemic arrived, the company’s fate appeared to take a turn for the worse. GameStop is largely a brick-and-mortar enterprise, and the coronavirus was putting people off in-store shopping for good reason.
People on WallStreetBets are engaged in what’s called “day trading” or “retail trading,” which is generally considered very risky by people whose job it is to give serious financial advice. At WallStreetBets, some users came to believe that GameStop stock was genuinely undervalued. In late summer, a Reddit user with the handle DeepFuckingValue began recommending GameStop stock via his YouTube channel, where he goes by RoaringKitty. (In real life, he is a financial adviser from Massachusetts named Keith Patrick Gill, according to CNBC.) The company, he argued, had already boosted digital sales. It was acting economically by closing some of its stores, and it would soon benefit from the release of new gaming consoles.
While on the other hand, some hedge funds including Citron Research and Melvin Capital were not nearly as optimistic about GameStop’s future in the coronavirus era. Eventually deciding to short the company’s stock, and people on WallStreetBets found out about it.
Reddit’s WallStreetBets forum fought back, buying up shares to send stock prices even higher. The result was panic among some short sellers, some of whom were forced to cut their losses and buy back their stocks at even higher prices, allowing them to be returned to the original investors. That demand just sent GameStop’s stocks soaring even higher, reaching the height of $447 a share. DeepFuckingValue, the Redditor who helped launch the GameStop trend, posts regular updates on his gains. Having turned an initial $53,000 investment into an astonishing $30 million.
The community celebrated when Melvin Capital gave up attempting to short GameStop, having taken a massive loss. Melvin, however, quickly shored itself up with a $3 billion investment from two other funds. Additionally trading exchanges such as Robinhood, one of the main epicenters of the stock mania restricted trading on stocks buffed up by online traders such as Gamestop.
Now Robinhood is facing dozens of lawsuits after the company restricting trades on stocks such as Gamestop. At least 30 parties across 10 states have sued the company in federal court, many seeking class action status. They allege that Robinhood users lost millions of dollars because they were unable to buy or sell stock during the freeze, and that the company chose to “manipulate the market” to help other financial institutions.
“Robinhood essentially abandoned its customers altogether by pulling GME (GameStop), a standard of care so far below what is required for a business engaging in time sensitive trading services that it amounts to a complete abandonment of its duties,” Nelson claims in the lawsuit, which was filed in a US District Court in New York. As the lawsuits towards Robinhood proceeds, the Wall Street story of David and Goliath continues. The frenzy made it clear to hedge funds that average-Joe retail traders more of a force to be reckoned with.