Gamestop: is the game over yet? You'd be surprised…
Sep 8th update:
The number came out on Jun 1st at 12.7 mm shares:
As of July 30, 2022, 71.3 million shares of our Class A common stock were directly registered with our transfer agent.
The pace is now accelerating in terms of number of shares but notional as well.
Jun 14th update:
The number came out on Jun 1st at 12.7 mm shares:
As of April 30, 2022, 12.7 million shares of our Class A common stock were directly registered with our transfer agent.
This amounts to a little less than 1.3 mm shares a month, or at the current share price, around $160mm a month locked out… Progression after 9 months is at least linear, at best accelerating a little. To be continued…
My friends know this is one of my many obsessions, so I could not resist sharing about it here. Gamestop, that old lady. You know, the dying brick-and-mortar video game retailer with thousands of shops around the world, owner of Micromania for my French readers.
If you only relied on the mainstream media titles, you may think the ‘meme’ is limited to Jan ‘21, when the company’s stock (symbol GME) was bid up from $19 to $508 before quickly falling back down to $40 in Feb ‘21.
I was there, that was very exciting, I admit it. But the story did neither start nor finish back then. Although the stock has not made new highs ever since, it is still up 5’200% from its covid low, 2’000% from Jan ‘20. Well, that’s my way of putting it, media outlets would just tell you it is down 70% from its peak.
Apart from the stock price (it was up again 43% last week, closing at $137), the Gamestop ‘saga’ is very well alive and we could hear about it again in the near future.
One particular phenomenon caught my attention early Sep ‘21. Part of the retail investors who took part in the Jan ‘21 events started circumventing the very market mechanics that made that particular setup possible throughout 2020. The scale of the movement, nearing 800k people at the time of writing (not even accounting for their offline circles) is unprecedented, at least in scale.
The ‘dying brick-and-mortar’
Gamestop is a publicly traded video game retailer with thousands of locations across North America, Europe & Australia. The company showed weak fundamentals, bad outlooks and no plan for a turnaround after years of decline. Management would just appear to sleep at the helm of a sinking ship.
With many headwinds, the company was consistently described as an obvious Blockbuster-style bankruptcy candidate.
Magic Money
With a weak balance sheet, covid lockdowns could have been the nail in the coffin for Gamestop, and excess liquidity exacerbated by the monetary part of covid response led to an unprecedented buildup in short positions, mainly held by hedge funds betting against the stock.
Retail investors have been largely blamed for their handling of their stimmy money (was there a mandatory guideline for spending that money after all?). We read plenty about boredom-induced stock trading craze during lockdowns. I, for one, believe free magic money has been mismanaged at every possible level. Irresponsible bets are not the prerogative of retail investors (mbs/subprime anyone?).
Bears Vs Bulls
Gamestop is not a “meme”. Gamestop is biased judgement & bad risk management on one side of the trade, facing full asymmetric opportunity exploitation.
In 2019, even before covid, a handful of underdogs, independant analysts started sharing the contrarian thesis about Gamestop online, mostly hoping for the upcoming video game console cycle to be the catalyst of the successful e-commerce turnaround needed to reverse the dangerous trend.
The market for gaming has continuously shown strong growth, and Gamestop, one of the most recognised brand in that very market, with 55m faithful loyalty card holders, could pull it off after all. Failing to do so seems like a challenge to me, but I agree the core business model definitely had to go.
The campaign to use “brick-and-mortar” as a pejorative also sounds off at a time when e-commerce giants such as Amazon have ramped up their investing in brick-and-mortar, after shelling out $13b for a 400 locations strong Whole Foods in 2017, as well as investing substantially in AmazonGo.
Introducing Ryan Cohen 🐸🍦
A few years after his successful exit from Chewy, which he founded and grew up to $3.5b revenue, activist investor Ryan Cohen accumulated ±13% of Gamestop shares during fall-winter ‘20 and championed the turnaround thesis, as seen in a letter to the board dated Nov ‘20.
His stance continues adding to the credibility of a bullish case for Gamestop and gave credence to the earlier contrarians. After having been mocked for months on end, they started showing incredible profit from the Cohen-provoked rally, promoting their conviction with a lot further reach.
r/wallstreetbets
A tremendously positive sentiment brewed among investors (not only retail). Anonymous users flooded Reddit board r/wallstreebets, a place for people calling themselves “retards” (a circumstantial anagram for “traders”) to share their risky buy of mostly short-dated, out-of-the-money calls. The forum grew from 1m to 10 mm subscribers in Jan ‘21.
While short sellers had overplayed their hand with short interest reported at 140% of outstanding shares (the most shorted stock is at 49% short interest at the time of writing, which is already a lot by any standard), “retards” upped the ante and flooded the options market with orders, putting huge pressure not only on short hedge funds, but brokers and market-makers as well.
Interactive Broker chairman Thomas Peterffy admitted on live TV that brokers (including his company) were on the hook for 150m shares for options hedging purpose only (not accounting short positions) when only 60m existed, potentially pushing a whole chunk of markets at risk of ‘breaking’ (ie. bankruptcy).
Position Close Only
On January 27, while the stock opened up nearly 2’300% year-to-date, increased capital requirements ‘forced’ around 30 brokers to place the stock in “Position Close Only” (PCO) meaning their customers were only made able to sell their shares (no buy possible anymore), creating an unprecedented outrage.
As a comeback to what they deemed cheating in favor of short sellers, the Reddit crowd has chosen to ignore the “sell” button ever since. And even went a step further.
Whatever you do, do not ever piss off Reddit
The thing is, a whole lot of those ‘investors’ come form the gaming sub-culture. They tend to spend stupid amounts of time and energy (I cannot emphasise it enough after things I’ve seen in that field) obsessively trying to beat the game, reach higher scores, top halls of fame. Only for the satisfaction of winning and not really much more. In a sense, the Gamestop saga is a very chaotic e-sports moment…
I believe people on the wrong side of this trade underestimate that grit. They conveniently blame greed (mostly projecting in my opinion), when it is not really about money. It is just about winning a massive game of chicken by researching and exploiting the rules to their full extent while overreacting to a cheating opponent. I currently see no reason in the world for these gamers to back down.
One golden rule known to us Internet sleuths can be summed up like this: never mind pissing off Twitter, you’ll live on, but for the love of God, never pick a fight with Reddit.
On Shorts 🩳
Without going into too much detail here (will do it in later parts), the market mechanics I alluded to earlier have made it possible for short sellers to sell up to 140% (according to FINRA, ±220% according to the SEC) of outstanding shares in the company.
The Reddit thesis is quite simple: if short sellers have been able to sell more shares than existed prior to Jan ‘21, then, longs had likely bought up more shares than existed as well. It takes two to tango, right? A sale is between a seller and a buyer. Sold 140% demands someone bought 140% somehow. Or please do tell me I’m the dummy here.
Since shorting demands borrowing shares, and one cannot borrow more than exists, this probably means some shorts where ‘naked’. Naked shorting is illegal even in the US by the way. I think of it as paying credit card debt with other credit cards. The debt increases and is just very slightly spread over a little bit more time. And it comes back to bite you hard in the end.
On top of that, Redditors took the “PCO” episode of Jan 27 ‘21 as an insult from a cheat, which is far worse than a regular insult. They ‘heard no bell’ and refuse the theory that shorts closed out their losing positions in what was described as a ‘short squeeze’. They did not see the ‘game over’ screen yet, and they are not in a hurry. The SEC agreed this was no short squeeze. ‘Where did the shorts go then?’ will be left out for today, but I have visual hints:
Is that thesis right or wrong? It does not matter really matter for the rest of the story. What’s very interesting to me is the quest Redditors have taken on as a result of all that build up.
Direct Registration of Shares (DRS)
Cutting to the chase at last, what the reddit crowd started doing is simple. 140% short interest means the price is wrong, because it is suppressed by an illegitimate sell pressure. In order to put the lid back on that phenomenon, they are gobbling up shares of the company, not to trade them, but rather just ‘buy and hold’. And they found the seemingly perfect way out of the common route of brokers, clearing houses, market-makers, ‘payment for order flow’ that allowed the cheat in the first place.
They started hoarding shares the most direct but curiously inconvenient way: through the company’s transfer agent. The one entity handling actual shares on behalf of the company. In the case of Gamestop, the transfer agent is Computershare. They even transferred out shares previously bough from brokers as well. Out of the regular system, and into their Computershare accounts.
The nod from Gamestop
This might sound pretty speculative, but early while going down that route, those Redditors tried to estimate (or guess really) how many shares had been directly registered so far. And just like that, when people were seeking that number the most, Gamestop itself started including it in their quarterly report for the very first time.
From their Q3 2021 10-Q:
As of October 30, 2021, 5.2 million shares of our Class A common stock were directly registered with our transfer agent, ComputerShare.
From their Q4 2021 10-K:
As of January 29, 2022, 8.9 million shares of our Class A common stock were directly registered with our transfer agent, ComputerShare.
Jun 14th update:
The number came out on Jun 1st at 12.7 mm shares:
As of April 30, 2022, 12.7 million shares of our Class A common stock were directly registered with our transfer agent.
This amounts to a little less than 1.3 mm shares a month, or at the current share price, around $160mm a month locked out… Progression after 9 months is at least linear, at best accelerating a little. To be continued…
No one knows what the Q2 2021 number was, leaving us with only 2 data points so far. Is it asymptotic, linear, or exponential? Next one up is coming tomorrow, Wednesday June 1st ‘22 after market close. I’ll keep a weather eye on that third number, should it appear again.
The hypothetical liquidity crisis ensuing Redditors direct registering more and more shares could probably make it to business school case studies, if they pull it off.
After nearly 18 months, the dedication is real. This is a lot more gaming than investing, I agree. Well, ‘obsessive gamers’ are truly a curious breed.
This is part I of an ongoing series about the ‘Gamestop Saga’ I will insert in between other posts. Next up will treat Bitcoin fundamental value (is it 0 or more)?. After that, I am lining up a piece on physical Uranium investing. Subscribe to keep posted!
Links
https://www.reddit.com/r/superstonk
https://www.youtube.com/c/roaringkitty
https://www.reddit.com/user/deepfuckingvalue
About me
Victor Martin (twitter | linkedin)
Entrepreneur, business consultant to founders, investors in information technology, innovation and alternative investments.
Disclaimer
Funds I control or advise are currently long Gamestop. None of the information provided in this newsletter constitutes financial advice. This is intended for entertainment, education and general information only. Do not act on this information without making your own due diligence or do it at your own risk.