Retail traders rally behind GameStop shares in defiance of lawsuit

GameStop’s move into NFTs has supported a substantial rise in its share price, in spite of a potentially damaging lawsuit brought by its consultant. But is the support from retail traders who frequent Reddit’s WallStreetBets sustainable?

News that the video game retailer was being sued by one of the world’s largest corporate advisors spurred retail traders to ignite a rally in the GameStop [GME] share price last week. The stock has jumped 108.8% in the week since a complaint was filed in a US district court on 21 March, representing its largest share jump since March 2021.

In a lawsuit complaint, Boston Consulting Group accused GameStop of “bad faith refusal to pay fees”. The firm said that prior to engaging with the retailer back in 2019, “Gamestop was in a financial and strategic tailspin”. “Its stock had cratered, it had cycled through a series of executives, and had a heavy debt burden that was coming due.”

After the lawsuit complaint was filed, retail traders from Reddit’s WallStreetBets flooded to the stock, sending GameStop shares soaring 67% in the trading week commencing 21 March to close at $151.95 on 25 March. While the stock closed at $189.59 on 28 March, it is still trading 44.9% below its 52-week high of $344.66 that it reached during intraday trading on 8 June 2021.

NFT marketplace lifts GameStop’s share price

GameStop has said that it plans to launch a non-fungible token (NFT) marketplace at the end of the second quarter in July. Trading NFTs has become extremely popular among retail investors and traders, especially the Reddit crowd, as an alternative to holding cryptocurrencies, which have seen prices slide in recent weeks and months.

The move into NFTs is in a bid to shore up capital for the company, which swung to a $147.5m loss in the fourth quarter, after having reported an $80.5m profit in the year-ago quarter. Plenty of analysts aren’t convinced by GameStop’s move, with Wedbush Securities analyst Michael Pachter telling Yahoo Finance back in January that it’s “a dumb idea” that will be “dead on arrival”.

Pachter admitted that NFTs are likely to become a core part of in-game content over the next decade or two, but has doubts over GameStop’s position in the NFT space. He likens the company’s move to Walmart [WMT] taking advantage of the video-on-demand space simply because it recognised that its customers would end up buying most of its DVDs at its stores. 

In a separate interview with Yahoo Finance following the earnings miss in March, Pachter said: “This NFT exchange better work, and I don't see how it possibly can. We'll see if people really want to buy [NFTs] on the GameStop exchange. I'm betting probably not.”

Reddit traders not deterred by legal action

Regardless of whether GameStop can make its NFT marketplace work and turn the fortunes of the company around, the stock is on the radar of the Reddit crowd again. The platform had posted a discussion thread on 22 March that said the share price was then trading at a 58.2% discount to its 15-month fair value.

So-called ‘ape investors’ are likely to continue snapping up shares as long as the short interest remains high.

As of 14 March, it was at 26.62% of the float, according to Yahoo Finance data. This could have a rub-off effect on other meme stocks. The AMC [AMC] share price rose 28.10% in the trading week commencing 21 March – 20.29% of its float is short. Bed Bath and Beyond [BBBY] is another one to keep an eye on. Although only gaining 2.36% in the five days from 21 March, it remains very highly shorted at 44.57% of its float.

The Reddit crowd don’t seem to care about a company’s financials, which could mean that further developments in BGC’s lawsuit against GameStop are unlikely to deter them from investing.

As for GameStop’s take on the legal action, it hadn’t yet commented at the time of writing. Its CEO Matt Furlong did, however, say on the earnings call in March that “we ended relationships with high-priced external consultants who were costing the company millions of dollars per year”. It’s not clear whether Furlong was referring to BGC.

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