Potential Short Squeeze, New Billionaire Investor — What Is Going On With GameStop?
We are reading more and more about a big potential short squeeze of GameStop. How real is this?
First: When looking at the numbers, shorting GME doesn’t seem to be the dumbest idea ever:
- Sales have plunged from $9.5 billion in fiscal year 2011 to $6.4 billion in fiscal year 2019.
- Net income has fallen from $339 million in fiscal year 2011 to a staggering loss of $470 million in fiscal year 2019.
- In the two most recent quarters alone, the Company has lost another $277 million.
- GameStop is one of the most shorted stocks in the entire market.
But also, some things are going well:
- E-commerce revenue grew roughly 500% YTY in 2020 Q1 and roughly 800% YTY in 2020 Q2.
- In December GameStop voluntarily pays off debt.
- GME will receive constant revenue flow from sales of Xbox All Access thanks to multi-year revenue-sharing partnership with Mircrosoft (MSFT).
And there is a big new shareholder. Chewy.com founder and self-made billionaire Ryan Cohen bought 9.98% of GME shares. He has recognized the booming gaming industry and realized the potential of the GME brand. For example GameStop more than 55 million PowerUp members.
“GameStop’s leadership should immediately conduct a strategic review of the business and share a credible plan for seizing the tremendous opportunities in the rapidly-growing gaming sector. GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences — not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem,” he writes in a letter to the board titled „Maximizing Stockholder Value by Becoming the Ultimate Destination for Gamers“. The full letter is here.
In the three-page letter he thinks the following steps are necessary to make GameStop great again:
- Forgo upcoming two-year lease renewal on underperforming stores
- Streamline or sell non-core operations in Europe, Australia
- Use cash flow from new console cycle to finance the future
Back to the potential short squeeze.
What is that exactly?
„A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals. A short squeeze can occur when there is a lack of supply and an excess of demand for the stock due to short sellers covering (liquidating) their positions.“ (Wikipedia)
As of right now the short interest of shares outstanding is over 100%, meaning that more than 100% of the available shares have been shorted.
Remember: In the last few weeks the stock price has gone up. Many shorts should be underwater by now. And this is exactly how the short squeeze could go down: More and more people seeing the potential in GameStop, buying shares and therefore boosting the stock price. The shorts loosing money and are forced to cover, which os difficult since they shorted over 100%. Demand increases even more for these remaining shares. The price rises, shorts cover and on and on…
How high it could go? I don’t know.
But let’s say, even if there is now short squeeze happening, I think GameStop still is a solid company with huge upside potential
GameStop isn’t going bankrupt (at least not in the near future, it seems…). They pay debt off voluntarily, they have cash on hand. With the new console cycle they have cash flow. Ryan Cohen — a men who has shown to the world that he is an e-commerce genius — is here to make pressure, forcing GME to go from the brick and mortar world towards the digital world. And here GameStop has a lots of potential to gain market share in the booming gaming sector. Cohen writes: „We want GameStop’s leaders to do their jobs and implement a strategy for bringing the Company into the 21st century.“
It took less than 10 years to build Chewy.com to a 30 billion dollar brand.
GameStop is valued at 1.1 billion as of November 30, 2020.
Let’s enjoy the show.
-JW
Note: This is not investment advice. Do your own research.