If you partook in the Gamestop short squeeze you should read this
I'm a 28-year-old millennial investor who all but has a portfolio in growth and tech stocks. Trust me guys, we need to have a chat.
You'd call it the collective trade that broke the internet. It's the one story that has had CNBC, CNN and Bloomberg buzzing since mid-last week. The Gamestop Reddit short squeeze. And if you're confused about what I'm writing here about, or you heard about it and weren't sure what it meant or (alike to me) you've been on holiday to find all hell broke loose on the markets. Never fear, I'm here to explain.
But to do that I feel like I need to start at the absolute start. Let's talk about Gamestop. If you're in Australia, Europe, Asia or Africa you probably have no clue what Gamestop even is. Gamestop is the American equivalent of EB Games. Basically, they're a huge bricks and mortar retailer of video games, and when I say huge we're talking about large amounts of locations per American city.
Gamestop had a pretty bad 2020. Initially, the COVID19 pandemic panic was not good to them. They had to close stores in states which had stay at home or lockdown orders and in the states that didn't their sales plummeted. In other words? The whole Coronavirus ordeal for them has been all but trash. And this reflected in their Q2 2020 financial results. The company posted a whopping $470 million in net losses and had announced the permanent closure of over 300 of their American sites. It was bad, it was real bad. It was so bad that the company (which was trading publically) was resigned to a $3.25USD share price which it had held almost 12 months ago to this day (February 2020).
In comes an unlikely saviour for Gamestop, Chewy. If you're from any of the aforementioned nations you're probably asking what Chewy is? Well, Chewy is an extremely successful online pet product retailer from America. And their founder Ryan Cohen is known for producing gold from lead. He's basically the messiah in America for taking a tangible and physical location or idea and putting it online. Much alike to Australia's Ruslan Kogan (who founded Kogan.com and eventually bought Dick Smith electronics, converting their entire cohort of multiple decade in-person customers to online customers).
Ryan Cohen bought a 10% stake on Gamestop this year taking that measly $3.25USD share price to new heights of almost $38USD. It was an obvious sign of confidence in the internet brainiac. He then raised that stake to 12.9% on December 17th and the stock price once again took a ride.
"But Marcus" I hear you scream, "what does this have to do with Reddit or short squeezes."
Hold your horses, I'm getting to that. And yes this might take a little while. And for those who know everything about this and maybe even partook in the short squeeze please feel free to race ahead to the part where I tell you exactly what you need to do now.
In late November and after Gamestop reported their Q3 financial results Ryan and his team had finished an audit of the company and penned an overly honest critique of the companies structure and management. And trust me? This letter was brutal. It's available online, but I'll give you the gist of it.
Basically, he started by making a few good points about the video gaming industry which anyone in growth stocks already knows. In 2019 the gaming industry was worth $180 billion and is projected to reach a conservative $220 billion by 2023 (just 2 years from now). In comparison, the shrinking film industry was worth $40 billion in 2019 and shrunk massively (driven by COVID19) in 2020.
Ryan claimed that Gamestop hadn't taken advantage of the astronomical growth having lost substantial amounts of market share over the past 3 years to competitors. But remained upbeat about where the endgame could lead, that is if the company revolutionised its business model extremely quick it could emerge a market leader.
He finally claimed that the business over-prioritises the bricks and motor side of their business which in turn neglects their non-functioning online systems and in turn is killing the retention of what has been an otherwise loyal customer base including almost 55 million "powerup" loyalty members. He finishes by urging, if not begging, the board of the company to conduct an immediate strategic review and start a new business plan to seize on the gaming sector opportunity.
You'll never guess what happened next, Ryan and three of his associates got appointed to the Gamestop board and the company is doing exactly as he requested of them. In fact, you'd almost call it a hostile takeover of the company which ended in Ryan's stake rise of Gamestop in December.
WallStreetBetts and the short squeeze
This is where we get to the juicy stuff. There's a Reddit, which admittedly both myself and my investor mates have kept an eye on in the past, which is known as "WallStreetBetts". Essentially the Reddit thread is made up of millennial and next-generation investors who sit around shilling each other all day. It's like one big mutual admiration society of the stock market. If I were to give you a real-world example it's a bit like how Holden Commodores have shot up in value since Holden's closure announcement in 2020. No-one outside of the Commodore bubble wants to buy a Commodore or thinks those cars are worth what they're being sold for, but within that Commodore bubble, these cars are changing hands at stupid prices more than any other car I've ever seen. It has literally become its own economy.
This WallStreetBetts Reddit page is much the same. Basically, next-gen investors trade with each other and sell stupidly overpriced company stock for other stupidly overpriced company stock on a near-daily basis. It also makes those companies self-sustaining, because those investors are giving those companies money to buy shares of the company (and literally nothing else of tangible quality).
A few members of this Reddit community caught wind that some older banks, funds and indoctrinated investors had extremely sizeable short positions on Gamestop. In fact, the sizes of shorts on Gamestop were almost laughable, which fair enough almost no-one expected to maintain a price of $38USD and I'll tell you why later on.
These Robinhood Reddit investors banded together to serve some of the biggest financial institutions on gods green earth an almighty "f**k you". And they started partaking in what is known as a short squeeze. Basically, investors buy up huge positions at low prices on a stock and then buy smaller positions at higher prices to create the illusion that the price of said stock is rising in the hope that the market catches on and the overall volume of the stock increases and locks-in that new price.
I don't think anyone on that Reddit thread thought this squeeze would get to the point it has. As of writing this article, Gamestop finished after-hours trading at $209USD, a whopping +3,600% increase on last February's original value of the company. And some overly bullish analysts have said it's going to continue shooting up to heights of $2,000USD.
Those short traders are now being forced to bail out at huge losses on their original positions. So huge that pundits like Jim Cramer from Mad Money are theorising that it could send some of the biggest institutionised investors flat broke. Those same Robinhood millennials who the bigger Wall St institutions normally laugh at are sending those same institutions broke.
What is Gamestop?
This is where I start by telling you I was not involved in the short squeeze. While I appreciate the crazy coupling of luck and big-brain craftsmanship that went into the entire play, I just don't have it in me and I'm far more risk-averse investor and enjoy extremely healthy returns on my own growth and tech stock-based portfolio. But I do have a message for you if you were a part of that squeeze.
Get out, get out now. You've made a 3,600% return on your investment which is almost 600 times better than all of the indexes. You've also probably made multiple tens of thousands of dollars or if you were as smart as Ryan Cohan and Dr Michael Burry (Scion Asset Management and one of the short-sellers of the 2007 GFC) you've probably made hundreds of millions of dollars.
If you continue listening to these idiot Redditors they are going to take those huge whacks of money and send you broke long. And while I could well be wrong here, 5-10 years down the track I will absolutely not be wrong. Because unlike most of those same millennial investors I'm also a marketer who specialises in the area of consumer habits. And I'm about to make an argument for why Gamestop may not have a choice in its fate.
When you're doing a business plan at an executive management level one of the core questions you need to ask is why does my business exist? Do I have the option to control my own supply chain? Is it financially viable to do so. Gamestop exists as a middle-man retailer and the company is completely reliant on their publishing and hardware partners' (Sony, Microsoft, Activision, EA etc.) supply chains. And that only works as long as those partners are willing to relinquish part of their own supply chain (the retailing part).
But as demonstrated with the most recent Playstation 5 and XBOX Series X releases, Sony and Microsoft are taking a page out of Apple's book and moving ever so closer to controlling the supply chain end to end. Microsoft want to move to a subscription only model with Game Pass and Sony are heavily pushing the Playstation 5 Digital so that they make revenue off games sold through the PS Store (the Playstation equivelent to the iPhone's App Store).
Publishers in video games are pushing for this change as well because it means they don't need to produce the environmentally unfriendly Blu-Ray disc and instead only maintain data centres which are becoming cheaper and more effective by the day. That means the publisher can take more of a profit in the endgame.
It's not just happening with consoles either (which by far are still the largest volume segment of video games on earth), the professional and gaming PC market has been heading in that direction for almost a decade. Online video game stores like Steam, Battle.net and the Epic Games Store have been stupidly ludacritive assets to their respective publishers (in the case of Steam, Valve were making so much money off onselling video games that they reduced the size of their video game development staff and resigned to only onselling video games and taking a cut of the profits).
All of this combined with the fact that almost all third party gaming accessories producers have direct supply chains or prefferred online retailers (like Amazon or Best Buy) means that third part online and bricks and mortar retailers are all but dead. In fact I estimate that a retailer like Gamestop can take advantage of the next generation console rage for no more than 5 years before it needs to downsize. If the company moves all online it may buy itself more time. But it won't be growth, it will only be clawing back market share that it had previously.
With no future opportunity, less likelihood of the consumer to want to visit a physical store to buy an item and supply chain channels only getting better as time goes on the longterm opportunity for Gamestop is minimal.
It's my belief that the short squeezers knew this. The level of shilling that went on with this stock over the past 4 weeks is phenomenal. So much so that my brother who is also very much a growth stock investor but also very much Australian called me on Thursday to exclaim "What is Gamestop? And why is the share price up 1,700% in two weeks."
An inside job
These guys are not stupid, every single one of them knew that if they generated enough of an inter-generation emotional response that you'd be able to mobilise billions of dollars sitting on the sidelines to stick it up to financial institutions. But it's also my belief that the original squeezers weren't doing it for that reason.
I'd say the original short squeezers on this stock already had money in the company and they'd started buying the stock before they had any clue just how bad the combined business structure and external environmental factors were. This company is literally a dead man walking.
And the worst part is? The share price is going to continue rising for at least another week. We're going to see this company and those who are controlling the squeeze make a whole lot of money until someone makes the decision to pop the bubble (a bubble which is currently trading at over 40 times the physical company value). And when that happens? Those squeezes are going to make billions while the typical Robinhood investor may just lose both their good fortune and more importantly their entire livelihood.
It's true, someone has got to lose out of this scenario and it's part of the reason I refuse to speculate on the stock. The risk is just way too high where it wasn't at about $3.5USD. So who wins out of the entire scenario? I mean it's obvious right? Gamestop has a short term win as does it's investors and the squeeze wins. But in order for them to win, everyone else needs to lose. And when I say everyone, I mean everyone. To elloquently quote Matt Graver from one of my all-time favourites films, Sicario, "F**k it all. Wipe it clean."