GameStop's Stock Frenzy: Is It a Bubble?
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What sudden price move made GameStop a headline story?
Here's your money briefing for Friday, January 29th. I'm Charlie Turner for The Wall Street Journal, filling in for J.R. Whalen. Shares of the video game retailer GameStop have skyrocketed in recent days, along with a handful of other companies including AMC and BlackBerry. A lot of the frenzy is being driven by day traders who've piled into the stocks, and their behavior is leading a lot of observers to call it a bubble.
I think this is a bubble. It has the characteristic of ludicrous overvaluation, totally disconnected from fundamentals. It has buyers who are coming in knowing perfectly well that there's no connection to fundamentals.
We'll talk about what's driving this behavior with our Streetwise columnist, James McIntosh, after the break.
The stock markets are transfixed by the video game retailer GameStop. Until recently, the company was widely regarded as an also-ran. But since the start of the year, it's gone up by more than 900% as of Thursday.
Who is driving the surge in retail trading for GameStop and similar stocks?
Many are saying it's caught up in a huge stock bubble. Here to talk about bubble behavior and the dangers that go with it is our Streetwise columnist, James McIntosh, who joins us from London. James, thanks for joining us. Hi, Charles. James, can you bring us up to speed? We know online traders have been pushing up the value of stocks like GameStop and AMC. Why? What did they see in these companies?
Well, the GameStop situation started out with a genuine improvement. This is what many people thought was a doomed retailer. It has the oldest business model you could have, the most out-of-date business model you could have. selling computer games out of physical shops. This is a business that's primarily moving online. People download their games. They don't go to the mall to buy them. So the stock had, naturally enough, been beaten right down by this summer. But then a guy with some serious experience, the guy behind Chewy, which is an online pet food retailer, he had sold that, had a ton of money and he bought in and started pushing for change. So there was a genuine reason for the stock to be better off because at least it now has some prospects.
So that was the trigger for what started things going and the price started rising from August. Plus on top of that, of course, things have looked up in the economy since then, which also helped. Now, all of that justified some rise in the price. It didn't even begin to justify what actually happened in the price. And that's down to Reddit, the group WallStreetBets, which leapt on it, leapt on the stock, a mix of things. Again, it started out with the genuine the genuine improvement. Some people there were arguing that the stock's worth a lot more because things are looking better. But they were also, quite rightly, pointing out that there's a short position in the stock of more than all the stock outstanding.
And that means if they could get enough people to come in and buy, they could get an explosive rise in the price, what's known as a short squeeze. And that's what's happened.
Can you explain those technical factors a bit more? Short sellers were betting GameStop's price would go down. So how does that contribute to the big jump we've seen?
A bunch of hedge funds, notably a big one called Melvin Capital, were short and they were known to be short. So as the share price starts rising, it starts to hurt the hedge funds. Eventually they give up and sell. So you know that they're going to have to cover their short positions. You know they're gonna have to buy back the stock. And if you buy it, if you can get enough people to buy the shares and hold them, then when they come to buy back the stock, There isn't enough for sale, and it just keeps going up. So that's the standard model of a short squeeze, and that's clearly a factor in what's been going on.
More generally, James, a lot of people are watching these prices skyrocket and calling it a bubble. Do you think that's the case? And what constitutes a stock bubble as we generally think of it?
Well, no one can really agree on what the definition of a bubble is.
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