Is The GameStop Rally Actually Worth It?

GameStop’s stock is roaring. But does the company have any potential to live up to the overblown valuation?

The story of GameStop’s stock rally is everywhere now. But we wanted to talk about the company itself. So, what do we know about GameStop and its history?

The Legacy Of GameStop

GameStop, also known as the Blockbuster of games, is a Grapevine, Texas-based video game retailer. The company sells video games in a physical store, and it wasn’t making much money. In 2016, the company had $9.4 billion in sales and that figure went down to $8.3 billion by 2019 and plunged to $6.5 billion in 2020.

Last year was difficult for most of the firms because of the pandemic and GameStop wasn’t protected as well because it had a physical store. The retailer lost nearly $800 million in 2019 and almost $300 million through the 39 weeks through October 2020. There might not be a strong future for the firm as it isn’t anticipated to turn a profit until 2023.

In their 2019 annual report, the company said, “Browser, mobile and social gaming is accessed through hardware other than the consoles and traditional hand-held video game devices we currently sell”. The report also said, “It may take significant time and resources to respond to these technological changes and changes in consumer preferences. Our business and results of operations may be negatively impacted if we fail to keep pace with these changes.”

So, there it is. When the entire world went online, several companies put all their resources into taking their physical stores online as well because that is where the money was. However, GameStop didn’t and they themselves understand their limitations in making such drastic changes to their business strategy. In the end, this company was doomed to fail, but why are investors buying its stock now?

The Unbelievable Jump

We know for a fact that GameStop wasn’t doing well. So, several short sellers did what they would naturally do. They bet against GameStop. You can read our article on Futures Trading to understand how short selling works.

In short, you know GameStop is doomed, so you bet against the firm to make money in the process. However, tables turned when a group of individual traders on Reddit’s r/WallStreetBets community started buying the stock frantically.

The company’s shares, which were trading $17 at the beginning of this year, soared to over $340 by Wednesday afternoon and the market value rose above $23 billion. The share price is more than 10 times higher than it would be based on the company’s fundamentals.

Apart from GameStop, AMC Entertainment Holdings and BlackBerry have also been trading higher. The thing to note is that even Indian traders have joined in the ride and so did investors from China.

Why This Frenzy?

This is said to be a crusade against the giants in Wall Street. The short sellers were too aggressive on GameStop because the company started the year as one of the most shorted companies on the market. So, how do Redditors buying GameStop’s stock affect the short sellers? Because this activity creates a “short squeeze”. What is that? Short squeeze is when the short sellers betting against GameStop are forced to buy more shares of GameStop to cover their losses.

The Blowing Bubble

In the end, we want to say that this is not a win-lose situation. GameStop is now at a valuation of over $23 billion but as per Bloomberg, the company’s actual valuation will probably be around $2 billion. When many people bet on Tesla’s growth several years back, it was considered to be an insane thing. However, Tesla lived up to the expectations. But that might not be the case with GameStop. Whatever that is happening now, is just retail investors trying to go against the big fishes in Wall Street.

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