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GameStop (GME - Free Report) has become an allusive public security that trades outside the realm of fundamental investing. GME has turned into a betting instrument for young Robinhood traders and hedge funds alike. Its bloated $11.3 billion market valuation doesn't appear to reflect this dying brick-and-mortar fundamentals or even future performance.
After the meme stock of the year failed to unveil the systemic restructuring plans that overzealous investors were hoping for in its latest quarterly report (12/8), more bearish calls on the stock pushed GME into a Zacks Rank #5 (Strong Sell).
The r/WallStreetBets Revolution
The rise of r/WallStreetBets (WSB) and their "Occupy Wall Street" mentality have proven an unprecedented ability to take down short-selling hedge funds with nothing more than a handful of memes. The groupthink-powered market-moving force that WSB has demonstrated to the market has instilled fear in short-sellers everywhere.
WSB catalyzed a paradigm shift in public equities at the beginning of 2021 when this fragmented options-juiced message board managed to rally millions of nostalgia-ridden freshman traders into GameStop (GME - Free Report) in a short-squeeze for the history books.
r/WallStreetBets and the GameStop Saga proved that retail investors are no longer just the little guys and should be taken as seriously as any hedge fund.
GameStop, an antiquated brick-and-mortar video-game retailer on the edge of bankruptcy, skyrocketed 2,700% in January of 2021, from $17.25 a share on the first trading day of the year to an intraday high of $483 on January 28th. WSB traders started getting 'bullish' about their childhood Eden when activist investor and founder of Chewy (CHWY - Free Report) Ryan Cohen decided to take on an active role in the company's "restructuring" (still yet to be seen).
This extraordinary price action was driven by a combination of short-term call options from WSB traders, which generated a leveraged upside on GME as market makers (in which most of these contracts originate) were obligated to buy more shares to hedge their delta-equivalent positions as the stock soared (gamma-squeeze), while short-sellers were forced to buy back their shorted stock at a much higher price to avoid losing more than they could afford (short-squeeze).
Individual investors have never been provided with this level of accessibility to options, a financial derivative previously reserved for "knowledgeable" investors. This high-risk tool has been utilized by freshman traders who have seen many more casualties than winning lottery tickets. Nevertheless, I see the GameStop Saga as an excellent learning experience for freshman and veteran traders alike.
However, GME has since turned into a gambling tool for momentum traders rather than a fundamentally driven stock.
Final Thoughts
There is nothing fundamental backing GME's over $11 billion valuation, with the company's quarterly losses only seeming to accelerate each quarter as its antiquated business model fails to adapt. GameStop managed to take advantage of its rich stock price by raising capital in a secondary equity offering. As of now, this additional funding is just burning a hole in its pocket. The company hemorrhaged over $300 in cash flows this past quarter. If this type of unexplained spending continues, it's only a matter of quarters before GME will be looking for bankruptcy protection.
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Bear Of The Day: GameStop (GME)
GameStop (GME - Free Report) has become an allusive public security that trades outside the realm of fundamental investing. GME has turned into a betting instrument for young Robinhood traders and hedge funds alike. Its bloated $11.3 billion market valuation doesn't appear to reflect this dying brick-and-mortar fundamentals or even future performance.
After the meme stock of the year failed to unveil the systemic restructuring plans that overzealous investors were hoping for in its latest quarterly report (12/8), more bearish calls on the stock pushed GME into a Zacks Rank #5 (Strong Sell).
The r/WallStreetBets Revolution
The rise of r/WallStreetBets (WSB) and their "Occupy Wall Street" mentality have proven an unprecedented ability to take down short-selling hedge funds with nothing more than a handful of memes. The groupthink-powered market-moving force that WSB has demonstrated to the market has instilled fear in short-sellers everywhere.
WSB catalyzed a paradigm shift in public equities at the beginning of 2021 when this fragmented options-juiced message board managed to rally millions of nostalgia-ridden freshman traders into GameStop (GME - Free Report) in a short-squeeze for the history books.
r/WallStreetBets and the GameStop Saga proved that retail investors are no longer just the little guys and should be taken as seriously as any hedge fund.
GameStop, an antiquated brick-and-mortar video-game retailer on the edge of bankruptcy, skyrocketed 2,700% in January of 2021, from $17.25 a share on the first trading day of the year to an intraday high of $483 on January 28th. WSB traders started getting 'bullish' about their childhood Eden when activist investor and founder of Chewy (CHWY - Free Report) Ryan Cohen decided to take on an active role in the company's "restructuring" (still yet to be seen).
This extraordinary price action was driven by a combination of short-term call options from WSB traders, which generated a leveraged upside on GME as market makers (in which most of these contracts originate) were obligated to buy more shares to hedge their delta-equivalent positions as the stock soared (gamma-squeeze), while short-sellers were forced to buy back their shorted stock at a much higher price to avoid losing more than they could afford (short-squeeze).
Individual investors have never been provided with this level of accessibility to options, a financial derivative previously reserved for "knowledgeable" investors. This high-risk tool has been utilized by freshman traders who have seen many more casualties than winning lottery tickets. Nevertheless, I see the GameStop Saga as an excellent learning experience for freshman and veteran traders alike.
However, GME has since turned into a gambling tool for momentum traders rather than a fundamentally driven stock.
Final Thoughts
There is nothing fundamental backing GME's over $11 billion valuation, with the company's quarterly losses only seeming to accelerate each quarter as its antiquated business model fails to adapt. GameStop managed to take advantage of its rich stock price by raising capital in a secondary equity offering. As of now, this additional funding is just burning a hole in its pocket. The company hemorrhaged over $300 in cash flows this past quarter. If this type of unexplained spending continues, it's only a matter of quarters before GME will be looking for bankruptcy protection.