Game Stop shares have literally headed to the moon, rising 1,200% this year, on the back of coordinated buying by the 2.7 million-strong r/WallStreetBets group on Reddit. In the process, hedge funds such as Melvin Capital, Citron Capital have borne heavy losses. Mint explains.
Nearly two years ago, a Reddit user first alerted forum members of a buying opportunity in GameStop Corp., a mall-based gaming biz on the decline. This wasn’t so much because of its business prospects. The reason given was the large cash on its books. Not many took notice, until famed fund manager Michael Burry acquired a stake in the company and wrote to the management to use the cash on its books to buy back shares. But even this resulted in only a small appreciation in the stock. Redditors started piling on en masse only late last year, after they saw a massive short squeeze opportunity.
What exactly sets the GameStop rally apart?
A couple of months back, the r/WallStreetBets group started seeing GameStop not only as a great trading opportunity, but also a means to get back at institutional investors. On 19 Sep, a thread called “Bankrupting Institutional Investors for Dummies, ft. GameStop" opined how there were already very large short positions built by institutional investors, and a further rise in shares would lead to high margin calls, resulting in a short squeeze. Things have played out in this fashion, with GameStop now valued at $17 billion, based on opening prices on 27 Jan. At the time of the post cited above, the firm was valued at $660 million.
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