Much has been written about the meteoric rise of the GameStop share price [GME] in recent months. But what impact are Reddit users having on the hedge funds attempting to short it?
Driven by meme stock fever, the GameStop share price is up a phenomenal 4,834% in the last 52 weeks to $214.14 at the close of trading on 30 June and 5,580% above its 52-week low of $3.77, set on 20 July 2020. The GameStop share price has gained 1,036% since the start of 2021, but has fallen 3.5% in the last month.
Despite the exponential gains, the GameStop share price is currently trading 55.7% down from its all-time high of $483, which the stock peaked at during trading on 28 January. Just a week after reaching these heights, the GameStop share price closed trading on 4 February at $53.50, down 88.9%.
GameStop's share price rise in the past 52 weeks
The reason the GameStop share price tumbled in a matter of days was down to trading platforms, such as Robinhood, restricting trading in the stock. While the platforms said they were forced to limit trades because of financial requirements, many retail investors saw it as a deliberate attempt by institutions to keep the power in the hands of those that control the market.
The GameStop share price saga has very much become a modern-day David versus Goliath story.
It started in October of last year when a Reddit user spotted that New York-based Melvin Capital had a short position in GameStop, according to its then-most recent Form 13F (a filing every hedge fund is required to submit to the US Securities and Exchange Commission each quarter). In their Reddit post, the user depicted Melvin Capital as the nuclear reactor at Chernobyl ready to blow up.
This triggered a move that saw millions of retail investors group together to bet against the hedge funds betting against GameStop.
Melvin Capital started 2021 with assets worth in the region of $12.5bn and by the end of January, their value had dropped to $8bn, according to reports.
On the other side of the pond, London-based White Square Capital recently announced it will be closing its operations. The firm had roughly $400m of assets under management but suffered a double-digit percentage loss as a result of its short position on GameStop. However, the decision to close up shop is apparently not a result of the losses incurred.
Florian Kronawitter, CIO of White Square Capital, told the Financial Times: “The decision to close down is related to thinking the equity long-short model is challenged.”
“There are way too many fish in the pond with the same strategy of long-short,” Kronawitter added.
“There are way too many fish in the pond with the same strategy of long-short” - Florian Kronawitter, CIO of White Square Capital
While the recent movement in the GameStop share price suggests that some of the positive sentiment has died down, the current percentage of shares also indicate that far fewer hedge funds appear willing to take a short position on the stock right now.
At the end of last year, 117.71% of GameStop’s float, or 71.2 million shares, were short. By the end of January, the short float was 35.39% or 21.41 million shares. And, by the end of March, it was down further to 17.68% or 10.70 million shares.
Long and short of it
Both retail investors and short sellers will likely be keeping an eye on whether GameStop manages to successfully execute its turnaround plan. A board shake-up has seen former Amazon [AMZN] executive Matt Furlong join as CEO and Chewy [CHWY] co-founder Ryan Cohen as chairman.
Their plan is to turn the beleaguered brick-and-mortar retailer into the Amazon of gaming. Cohen wants to lean on the model that helped him scale Chewy so successfully, so quickly. As part of the aggressive transition to e-commerce, Cohen plans to shutter many of the 4,816 locations it operates, while possibly turning some of them into training centres for aspiring e-sports gamers.
Colin Sebastian, an analyst at Baird, is yet to be convinced. In early June, Sebastian warned that the plan was murky and the share price could fall 90% from its current level; he set the GameStop share price a target of $25. On 28 June, Baird decided to temporarily suspend its price target until GameStop explains its new strategy in more detail.
For those who are bullish on the turnaround plan but believe the GameStop share price to be too volatile, the Wedbush ETFMG Video Game Tech ETF [GAMR] gives exposure to the industry. As of 1 July, it has allocated GameStop a 1.57% weighting. Its year-to-date daily total return is 22.05% as of 30 June.
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