Gamestop and Wall Street
GameStop Corp. was founded in 1984, Dallas, Texas as Baggage’s but took its current name in 1999. It is an American company which is headquartered in Grapevine, Texas, United States. The company engages in the retail of multichannel video games, consumer electronics, and wireless services, making it the world’s largest company in video game retail.
It operates through the following segments: United States, Canada, Australia, and Europe. With each segment having its own agenda; The United States segments include the retail operations and electronic commerce websites, Game Informer magazine, with more than 1.5 million subscribers, and Kongregate. The Canada segment comprises retail and e-commerce businesses. The Australian segment refers to the retail and e-commerce operations in Australia and New Zealand. The company has over 5,000 retail stores operating throughout these segments, where the majority of their stores are located in shopping malls. (However, in 2019 the company closed 321 stores alone. And due to the pandemic planning to close even more. )
It was a place where millions of people were able to trade in used games, debate the merits of different franchises and get advice from GameStop’s staff. Hence, in the 2000s it was a hit that allowed the company to open thousands of stores around the world.
However, now that the world is digitizing not many people are purchasing products from their local stores because it is more convenient to purchase or download them online. As a result, the company is losing its money and declining. It was worth about $21 billion a week before New Year’s Eve, but by New Year’s Eve, the worth dropped to $1.3 billion on the stock market.
GameStop is offering physical retailers at cheaper prices, however, stores like Target, Walmart, and Best Buy offer the exact same products and accessories. Even though GameStop makes the same products without any uniqueness or differences, the company is able to make enough money. So where does the money come from?
Due to having a strong relationship with manufacturers GameStop is able to earn money from their physical shops. There are two main sources of revenue. The first one is the video game product retail which is licensed by companies without contracts. And the second one is the technology brands: mobile and consumer product reselling with strict contracts. About 60% of their revenue comes from sales in the United States. And around 38% of their total sales come from the Holiday season. However, their net dropped 91% from 2016 to 2017.
How did it happen then? Well, one of the main reasons for losing millions is due to their strict contracts with Apple and AT&T. And now with recent events the company is trying to stay afloat.
Recent Developments
As with many unlikely and amazing things on the internet, the story here begins with Reddit. Particularly the subreddit, r/WallStreetBets, a group of rogue investors who are known to take insane risks for the sake of earning a profit.
Essentially, the investors from Reddit managed to inflate the stock price of GME by pumping money into its stock.
Firstly, let's discuss what short-selling is. Short-selling (or 'shorting') is a tactic used by investors, especially hedge fund managers, who are expecting the value of a stock to fall. Essentially, an investor borrows a certain quantity of shares from a dealer and sells them to another investor. Since they've sold something they've borrowed, and not something they own, they owe the broker they borrowed from. Now if the stock price falls, the investor can buy those shares at a much lower price than he borrowed them at and repay the broker at the same time, making a profit.
Now, GME was a prime target for shorting by big hedge fund managers. They were expecting the price to drop because a gaming-based company wasn't expected to do well in the corona afflicted economy. However, the investors from Reddit had other plans. They were expecting GME to rise in value, as there have been many new console releases, new video games and GME was planning on expanding its services. Naturally, there was a conflict of interest between the two groups.
Thus, the investors on r/WallStreetBets hatched a plan. They would pump money into the stock, inflating its value - making them some money and causing massive losses to the hedge fund managers. This whole process is called a short squeeze.
Ultimately, this led to institutional investors losing millions of dollars while day-to-day investors made over 1000% returns on their investments. This has angered the industry to the extent that major hedge funds have filed a lawsuit against Reddit. Certain stock trading applications have also banned individual investors from investing, which is a violation of their rights. All this chaos was caused by one subreddit hell-bent on making money.
The Bigger Picture
This demonstration of financial manipulation worries rich hedge fund managers and investors. Till now, investing was primarily an activity for the upper class, while the middle-class were minor players in the shares market. This action by the subreddit has shown that average investors when they band together, can influence the stock in unexpected ways.
Gamestop’s stock opened at $20 at the beginning of January and closed at $350 at the end of the month. Its peak was $500. Hedge fund Melvin Capital has been estimated to lose 53% of its total value over January. Many redditors, on the other hand, claim that they’ve earned over $1 Million from this ordeal.
This shows that there is a need for regulation - both for rich investors and middle-class investors. The rights of investors need to be looked at once again and middle-class investors need to be given more opportunities to enter the market. The right to invest must be protected, no matter who it is that is investing.
Reddit has also targeted the stocks of BlackBerry and AMC as well. Whether you support the subreddit or the hedge fund managers, this event will be forever remembered in investing history.
Written by Aidana Assylbek and Rayandev Sen; edited by Alidar Kuatbekov.
