What's the deal with Gamestop?

Lots of news coverage on $GME these days, what's the story?

Apparently the stock has more than 100% short interest (can any traders here explain how this happens?) while value investors including Michael Burry & Ryan Cohen are long.

It popped 20 points on an announcement of a deal with Microsoft, but that was just for MSFT to provide cloud services.

WallStreetBets is all over it, so there must be insane retail options action going on behind the scenes.

 

Anyone here cover this company? 

Comments (18)

 
Most Helpful
Oct 11, 2020 - 12:05pm

Don't cover but the stock has been in my PA a for a little over a year. To understand the recent huge jump, I think it's important to understand the bear thesis. To me, there were two parts of the bear thesis, one of which is not a big near-term risk now: secular decline of the physical gaming industry and potential bankruptcy resulting from historically poor capital allocation decisions.

 

That being said, GameStop was always seen as a huge turnaround play before Burry, but Burry wanted to get in front of a catalyst. In early 2019, the company brought on new management to close stores and cut expenses. In mid 2020, activists Hestia and Permit achieved board seats after being longtime investors. Even Julian Robertson was involved at some point long ago. 
 

The new console cycle starting holiday 2020 helps pad further hits from the secular decline. As for the potential BK, the company has refinanced half of its callable bonds due 2021 out to 2023, buying some time to hopefully use the cash generated from the new console cycle to pay it off. Excluding leases, the company is also net cash positive I believe.

 

The recent jump initially started when GameStop started taking PS5 preorders. Importantly, the new consoles had disk drives, which could prolong the GameStop ecosystem (software sales are higher margin, software can be traded in, etc). Online, the system sold out, and social media pictures showed lines forming outside GameStop.

 

The next leg up was the unveiling of Ryan Cohen's, founder of Chewy, stake in the company. Investors speculated that he would try to accelerate GameStop's e-commerce, which was already trending positively in the midst of COVID. 13-D filings such as the one you've cited with Burry have tended to move the stock up albeit temporarily. An additional disclosure showed that Cohen had spoken with the company and wants to have them compete with Amazon somehow. This helped lift fears of a secularly declining business.

 

Finally, the Microsoft deal most likely inspired confidence that GameStop would be here to stay longer than expected. I originally got in expecting it to be a melting ice cube and wanted to play the combination of poor sentiment and huge short interest. The logic of the increased confidence is that Microsoft probably would not want to do a deal with a business that won't exist after the next few years.

 

This flurry of news in a relatively condensed time frame in front of the new console releases most likely caused some short covering and retail interest (WSB). As for the 100% short interest of float, I'm not entirely familiar but I've read that shares can be lent out more than once, which would explain it. There's definitely more to this story, but this probably covers the recent events.

 
Oct 11, 2020 - 4:47pm

Naked shorts? 

  • 1
 
Oct 13, 2020 - 8:43pm

This isn't investment advice or anything, but I personally wouldn't open any new positions now. I actually pared down my holdings from maybe 1/3 of my PA to 5% when it got to the $8-10 range based on a rough DCF I did. I didn't sell the rest to see if the short squeeze would ever happen.

To your other point, it probably would be the case that stage 2 lenders would have to wait. I'm not a trader so I don't know for sure.

 
Oct 13, 2020 - 6:04am

Help Twice

As for the 100% short interest of float, I'm not entirely familiar but I've read that shares can be lent out more than once, which would explain it.

Also, that sounds like a disaster in the making.

What happens if there is a short squeeze of some kind, and stage 1 lenders have to wait until stage 2 lenders buy shares first?

 

 
Jan 23, 2021 - 5:49pm

Video games have been an atrocity since the widespread adoption of 3D graphics in the mid nineties. The most garbage industry making the most garbage products in existence, the worst humanity has to offer. And it had so much potential but went completely off the rails. Canary in the coal mine for today's retarded society.

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