By Jordan Toy
If you thought that we had gotten through the worst of the COVID-related market volatility after 2020, think again! You could be forgiven for thinking that this year would be a calmer year for markets, at least when compared to last year. However, this year has started off with a bang, market volatility as measured by the VIX index spiked significantly on January 27th which, as you can see in the two charts below, aligns very closely with the rise and fall of GameStop Corporation’s share price.
To provide some background, GameStop Corporation operates electronic game and PC entertainment software stores where it sells new and used video games, hardware and software, as well as accessories. And for those who didn’t follow the market madness closely, I’ve summarised some of the events below to get you up to speed.
One share of GameStop Corporation stock traded at $18.84 on 31 December 2020 and less than a month later that same stock could be bought for $483 on 28 January 2021, a meteoric rise of over 2463% in just under one month. Sound too good to be true? I think it’s fair to say it was indeed. GameStop fell to a low of approximately $40.5 in the second half of February- still well above its December levels but far below the peak price reached in late January. In fact, the last time the company traded in the fifty-dollar region was seven years ago in 2014. The below graph shows the staggering scale of the spike and subsequent fall in the share price on a five-year scale.
Possibly more concerning than the initial rise and fall is the subsequent rise of the share price through the end of February and into early March of this year all the way back up to the $265 region, especially when you consider that GameStop’s earnings in October 2020 (and for a numerous periods prior to that) were negative, meaning investors were willing to pay up to $483 for a share in a company that was loss-making with little prospect of earnings growing rapidly into the future. To its credit however, in its most recent earnings announcement on 23 March 2021 GameStop reported positive earnings per share of $1.34 per share, a turnaround from last three quarters of negative earnings per share.
You might then ask what incredible event could have led the market to become so optimistic about a tired old brick and mortar retailer selling video games? No, it has not got anything to do with their earnings per share, no they are not about to be acquired by one of the tech giants and no it’s not about some ground-breaking new business model or product. It went up for the same reasons all stocks go up, because enough people were queuing up to buy it. Except this is usually the case when there is evidence that justifies paying a higher price which, in my opinion, was not the case here.
A now well-known Reddit page (Reddit is basically a massive online forum) called WallStreetBets began pushing the idea of buying shares in GameStop to anyone who would listen. Now I’m sure many of us have seen that slightly crazed person ranting on the street corner from time to time and it’s no big deal right? Not many people end up listening to the rhetoric or taking it to heart and accordingly not much changes and the world carries on. The key difference with WallStreetBets and my example above is that people did listen – as of the time of writing this WallStreetBets had over 9.7 million members! What this boils down to is substantial power to move markets and asset prices, probably not comparable to the collective power of the large institutions
but nonetheless it still represents significant power to move prices and markets.
And this is exactly what happened during the initial rise in January/February 2021, enough people listened to what was being said on the WallStreetBets forum and the price rocketed (not quite to the moon but pretty close in my opinion). As the movement gained momentum more serious investors took notice, with some institutions hopping on the bandwagon for the ride, even though they likely knew there was no justification to do so other than the pursuit of short-term profits. Then Elon Musk added fuel to the fire in a late-night tweet simply saying “Gamestonk” (referring to shares in GameStop Corp) with a link to the WallStreetBets Reddit page. This tweet contributed to the stock rising aggressively in after-hours trading. To illustrate, GameStop shares were priced at $147.98 at the close of trading on 26 January and when trading opened the next day (after Elon’s tweet) the stock was trading at $354.83.
Unfortunately, all fairy tales have an ending and on January 29th this one entered a new chapter, with the stock price beginning its slide back down to $40.5 as of the market close on February 19th. However, it appears that the story isn’t over just yet, as mentioned above the share price shot back up to roughly $265 before gradually sliding back down to roughly $180 at the time of writing this article.
So, all in all a pretty wild rollercoaster ride for GameStop Corp shares and sure, some people made huge gains and some made massive losses but the only entity to come out of this just about the same as they went in – would be GameStop. To clarify, the company itself does not benefit from their shares increasing from a price of say, $10 per share to $20 per share as these shares are just changing hands between investors. One of the few ways that GameStop could have benefitted would be to sell more shares at these inflated prices, but this would’ve raised some red flags with the U.S Securities and Exchange Commission (SEC) – selling more shares to investors at prices you know are unjustifiably inflated would lead to potential scrutiny from the market regulator.
Possibly the most interesting part of this whole event though was how irrational markets can become and how supposedly rational investors willingly throw caution to the wind and dive headfirst into trades when they are having market FOMO. It just goes to show you that markets, as they always have been, are only as rational as we are and history has shown that we can be exceptionally irrational when money is on the line.
The full story of GameStop is more complex than the short summary I’ve set out above but to fully unpack everything here would make for an exceptionally long read. If you’d like to find out more I suggest you take a look at Matt Levine’s Money Stuff articles on GameStop. To close off, in following the rise and fall of GameStop it is clear to me that there is merit in trusting a professional to manage your portfolio and thereby having someone to lean on when contemplating any investment action, to remove personal emotion from the equation and make the logical decision for you in the long-term, even when short-term emotions may lead us to irrationality.