The ongoing GameStop (NYSE:GME) stock story raises lots of questions for investors, Wall Street, Main Street, and society at large.
It is important to remain mindful of the fact that fundamental financial truths will continue to underpin GameStop as a company and equity after this issue dies down. But it’s also necessary to discuss some of the larger implications as they relate to the implicit structures of our financial markets.
Before diving into my thoughts I’ll plainly say that I do not recommend investing in GameStop now. Perhaps the company will move toward a more contemporary business model as it relates to gaming and reverse course. Perhaps not.
However, I’m more interested in the implications of what transpired and what it says about our systems.
r/WallStreetBets GME Done?
Everyone was interested to see a group of hobbyist investors band together and fight to save GameStop and stick it to a hedge fund. I’m not sure about you, but a good part of me was hoping against hope during the whole thing. The laws of gravity dictate that what goes up must come down. That’s one thing. Obviously nothing justified GME stock rising to $350.
Fundamentals aside, Redditors faced a bigger problem. Which is why I have to begrudgingly agree with Associate Professor Anjana Susarla, Department of Accounting and Information Systems, Broad MSU. In an email to InvestorPlace Professor Susarla wrote:
“My advice will be to disregard the HODL type of advice. Ultimately, large hedge funds have the institutional power to keep their positions open, unlike retail investors. Robinhood announced that it would automatically close some positions if it deems that a client is at risk of not having the necessary collateral… The other concern is that social media can be intentionally manipulated wherein we have a cycle of social media hype fueled investing that is not related to the market fundamentals.”
I agree with the first part of that statement. Wall Street simply has more staying power owing to the capital it can direct towards its interests. GME HODLers will fall off.
Yet, I somewhat disagree with the second part regarding the dangers of social media-fueled investing disconnecting markets from market fundamentals.
Social Media Hyped
Dangerous hype fuels disconnected investing. I’ll agree with that. And both GME Redditors and hedge funds engage in it regularly. If short selling is a healthy part of market functionality, then so too is Redditors exercising collective action against that.
To me, the only difference is in type-casting hedge funds as pros and Redditors as amateurs.
When hedge funds decide to sell short a large position, they disconnect fundamentals from a given stock via the leverage their access to substantial capital affords them. The sheer reach of social media allows retail investors to band together and do the same. That’s the power of many.
If social media provides GameStop Redditors the power to disconnect GME stock from its fundamentals, so be it. People are brilliant. The truth is that they outmaneuvered Wall Street in this case. Wall Street functionality remains intact though because GME won’t win long-term. I could go on and on, but I honestly think it is all healthy and functional.
I digress though, because it is necessary to look at the so-called fundamentals.
After GME stock rose so precipitously to peak at more than $345, some investors may be seriously questioning why it doesn’t make sense to jump in now. After all, shares have dropped down to $60.
Well, perhaps if the WallStreetBets crowd miraculously manages to pump it back up again that makes sense. But realistically that looks very unlikely.
The larger narrative around Gamestop relates to Robinhood and WallStreetBets. However, the reality of dollar value rooted in some kind of quantitative-based, financial analysis remains important.
Don’t get me wrong, I am interested in the collective action of the Redditors in giving hedge funds a dose of their own medicine. But numbers are going to be more important moving forward.
Those numbers say that GME is worth $12 or $13 most likely, and perhaps as much as $30 to $35. There’s no reason to jump in now.
Short squeezes happen repeatedly. This GameStop short squeeze won’t be the last one. But it is an important one in the social media age. If nothing else, at least it gets us to collectively consider our financial markets a bit more.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.