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GameStop investors are back on a volatile roller coaster more than a year after the so-called “stock meme” phenomenon hit the headlines in early 2021.
While GameStop’s recent highs aren’t nearly as close to last year’s surge (when its stock hovered around $400 per share at one point), pundits said the stock price of the company far exceeded the actual value of the retailer.
“It’s hard to argue that the price is worth more than $80,” said Kevin Mullally, assistant professor of finance at the University of Central Florida College of Business.
On Wednesday, GameStop opened at $175. Since March 1, shares of GameStop have hovered between $78 and $189. Shares fell 5.1% on Tuesday, leading the New York Stock Exchange to briefly halt trading in the stock.
These developments have many people wondering why GameStop’s stock continues to perform above expectations.
The origin story
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GameStop is a retail store founded in 1984 where customers buy, sell and trade video games and other gaming accessories.
“GameStop as a company, if we separate it from the stock itself, was a dying company in a sense,” Mullally told NPR.
Hedge funds were thinking the same way in 2021.
“About a year ago they saw the stock price at around $20 was overvalued,” and started shorting the stock, Mullally said.
Short selling means that investors are betting against the company and will profit if the value of the asset drops.
Last year, amateur day traders banded together to drive the video game retailer’s stock price higher. The traders, organized largely through internet communities on Reddit, sought to fuel short-lived pressure on the video game retailer and trigger deep losses for hedge funds.
Melvin Capital and Citron were two of the funds caught up in the pressure, forcing them to buy more GameStop stock to cover their losses, which ended up driving the stock price even higher.
Jaime Rogozinski, the founder of WallStreetBets, a Reddit forum, said All things Considered last year that “it is the democratization of the financial markets” which “gives a voice to those who did not have one before”.
Mullally didn’t expect the fanfare at GameStop to last nearly this long.
“My prediction was that it couldn’t persist because people would end up losing money. Eventually it would have to stop,” Mullally said. “So far, I’ve been proven wrong.”
This is largely due to the support of online communities.
“Every time it drops below $100, people come back and support it,” he added.
What is happening now and why?
Part of that price hike is likely due to GameStop chairman Ryan Cohen buying stock in the company, said Christopher Kardatzke, co-founder and chief technology officer of Quiver Quantitative Inc., a data company alternative for retail investors.
Last week, Cohen bought 100,000 shares of the video game retailer, raising his stake to 11.9%, CNBC reported. He bought those shares through his investment company, RC Ventures
A move like this “is seen as an indicator of insider sentiment in their own company. It’s a valuable metric,” Kardatzke told NPR. “It probably made more people have more confidence to invest in GameStop.”
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Traders watching GameStop closely have no doubt witnessed the volatility of the title itself, he said.
“When you see price movement in a stock like GameStop, it generates a lot of discussion and gets a lot of people interested in what it’s going to do next,” Kardatzke said.
Mullally noted that it’s likely all about supply and demand.
The more interest there is in GameStop stock, the more demand some merchants seem to have, he said.
Mullally admits he remains baffled by the interest in a stock he sees as not particularly valuable.
“GameStop as a company doesn’t do anything productive,” he said. “But it’s like people buying pet stones or Beanie Babies. These things are basically worthless. It’s weird and I don’t understand it. But there are a lot of weird things that people buy and I don’t understand.”