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Reddit users drive GameStop stock prices sky high

Photo of stock graphs on a laptop

Still trying to figure out why everyone is talking about GameStop and the stock market? University Canada West professor Dr. Pooja Lekhi breaks down what happened and why.

GameStop has been big news in the markets for weeks after the stock became a target of Reddit's Wall Street Bets forum back on Jan. 11. 

However, stocks of the brick-and-mortar video game retailer continued to tumble in after-hours trading on Feb. 2. The short squeeze last week that propelled GameStop shares and other investments popular with the Reddit crowd now seems to be on a halt. GameStop plummeted 60% of its value to $90 per share on Feb. 2. 

According to CNN Business, that’s partly due to Robinhood, and other brokers, restricting the number of shares of volatile stocks like GameStop, AMC, Express and Nokia retail investors can purchase in a single stock at a time. Short interest in GameStop shares dropped to 39% of the float, from 114% in mid-January (IHS Markit data).

It all started after activist investor, and Chewy co-founder Ryan Cohen revealed a significant investment in GameStop and joined the company's board, leading some to believe that the stock was undervalued. Then Reddit users on the r/wallstreetbets subreddit built the foundations for a short squeeze on GameStop.

Shorting, or short-selling, is when an investor borrows shares and immediately sells them, in the hopes of buying them later at a lower price, return them to the lender and pocket the difference.

Traders on Reddit found out that GameStop had a high short interest rate and realized they could force a short squeeze, causing shares to skyrocket. Around 140% of GameStop shares sold short, and the rush to buy shares to recapture those positions as the price rose caused it to rise even further. The short squeeze was initially triggered by users of the subreddit r/Wall-Streeters. At its height, the short squeeze caused the retailer's stock price to reach a pre-market value of more than US$500 per share. Many other heavily shorted securities also saw price increases.

Since then, GameStop stock spiked some 1,625% across all of January and over 400% last week alone. CNBC reported that GameStop jumped as much as 18% to $384.89 in pre-market trading in January as point-and-click investors piled into the name while hedge funds rushed to cover their losses from shorting the stock.

On Jan. 27, r/wallstreetbets triggered a short squeeze on AMC Theatres, a company in a similar position to GameStop. The value of AMC Networks also increased significantly, mainly because the stock's name is similar to AMC's.

While the move led to huge gains for r/wallstreetbets traders, it also caused billions in losses to pile up for short-sellers and institutional investors, some of whom had to be bailed out.

Data provider Ortex estimates that short sellers were sitting on losses of around $19 billion in GameStop alone in 2021.

Stock Prices Halted Last Week

On Jan. 28, Robinhood and other major brokerage houses halted purchases of GameStop, AMC Theatres, BlackBerry Limited, Nokia Corporation and other volatile stocks from its trading platform; customers could no longer open new positions in the stock although they could still close them.

On Feb. 1 and 2, the stock price for GameStop declined substantially, losing more than 80% of its value from its peak price, recorded the previous week. GameStop shares lost 60% of their value on Feb. 2.

Still, the blood bath for short-sellers may be over as it seems Reddit traders have switched their emphasis to silver. Prices increased for the precious metal, causing silver miners to shoot up as well.

For weeks Reddit traders had taken advantage of GameStop's high short interest by flooding the stock with new buyers, causing a short squeeze. Now, with multiple brokerages limiting trading in the video game retailer and short interest falling, traders aren't getting the same meteoric returns seen in the last two weeks.

"Short squeezes can only last as long as there is a large short position in a stock. Once that dissipates, the situation changes completely," Matt Maley, chief market strategist at Miller Tabak & Co, told Bloomberg.

Other Significant Stock Moves

AMC Entertainment Shares of the brick-and-mortar retailer were down 41% on Tuesday, Feb. 2, as the retail trading frenzy appeared to fizzle. After rallying 300% in a short squeeze last week, speculative buying appears to be losing steam. Other Reddit trades like BlackBerry, Express, Genius Brands, Koss and Nokia were also lower on Feb. 2.

Amazon reported EPS of $14.09 on revenue of $125.56 billion. Analysts polled by Refinitiv expected a profit of $7.23 per share on revenue of $119.7 billion. The company also announced that CEO Jeff Bezos was stepping down from his post, effective later this year. Alphabet shares jumped 6% after the tech giant reported better-than-expected results for the previous quarter. 

Pfizer’s shares fell 2.3% despite projecting that it will make some $15 billion in COVID-19 vaccines sales this year. The pressure on the stock also came notwithstanding an accelerated timeline for U.S. vaccine deliveries. 

Dr. Pooja Lekhi teaches Financial Management, Global Financial Institutions – Risk Management Approach and other finance courses at UCW.

 

Published on Feb. 3, 2021.