Why GameStop Won’t Stop as Short Squeeze Continues Indefinitely

The true players on both sides of the market equation continue to emerge as GameStop (NYSE:GME) takes center stage. The media, along with the hedge funds betting against GME stock, appear to want the gaming retailer to fail. That requires stockholders in Reddit’s subreddit, WallStreetBets, or WSB for short, losing money.

A Gamestop video game store in the Herald Square shopping district in New York
Source: rblfmr / Shutterstock.com

The bad news for the short-sellers is that most of the WSB gang are not looking for a profit. Sure, a few speculators saw GameStop’s 52-week high of $347.51. Comparing it to the recent price, they may bet that a squeeze will send the stock to the $1,000 range next.

That play is unlikely, although it is not impossible.

GME Stock at the Center of the Battle

The media is honing in on several stocks that Robinhood restricted trading on. This included AMC Entertainment (NYSE:AMC), Koss Corporation (NASDAQ:KOSS), and BlackBerry (NYSE:BB). WSB must differentiate between squeezing hedge funds and getting taken advantage of.

For example, the Koss family and directors sold $44 million in stock. BlackBerry is amid a turnaround away from the smartphone business. Its long-term stock value depends on fundamentals, not a short-squeeze. Besides, the short float is in the single-digit range. This is nowhere near that of the short float on GameStock.

WSB’s squeeze play involves one premise: liking the stock and holding it indefinitely. The rational investor and speculator would normally buy stock to make a profit. WSB’s approach is entirely different. The stockholders in that group will buy the stock as an admission ticket to bring down short-sellers.

Outside investors who do not understand WSB will criticize them as speculators seeking gains. And because that is not the case, the short-sellers ought to get very worried.

Melvin Capital Loses 53%

Hedge fund Melvin Capital Management lost 53% last month. The media reported that the fund, which did not live up to its name of “hedging,” closed its GameStop short position. If true, the firm could have realized the maximum loss. If it had waited a few more days, it could have covered the stock in the low $50 range.

Robinhood’s interference in what stocks investors could buy may have contributed to the stock’s drop. Will the Securities and Exchange Commission look at the legality of such a move? The SEC will need to look at Robinhood’s related solvency and commitments in enacting such a drastic move. The regulator will most likely look at the relationship between Citadel and Robinhood with greater scrutiny. As the Washington Posts’ Douglas MacMillan and Yeganeh Torbati reported, “Reddit users accused Citadel and its billionaire founder, Ken Griffin, of pressuring Robinhood to limit trading of certain stocks, a move that may have prevented further losses for the short-sellers that lost billions betting against GameStop.”

Laddering Bids

Reddit’s WSB theorized that they had been victims of a short ladder attack. The idea is that hedge funds bought stock amongst each other at lower prices to hurt GameStop’s stock price.

Investors should look at GameStop’s value, growth, and quality score to come up with a fair value. According to Stock Rover, shares are worth $53.02.

GameStop has decent value.

GameStop has decent value.

Chart courtesy of Stock Rover

Readers may analyze GameStop’s prospects further in a 5-year discounted revenue exit model.

Metrics Range Conclusion
Discount Rate 9.5% – 8.5% 9.00%
Terminal Revenue Multiple 1.5x – 3.0x 2.0x
Fair Value $64.88 – $140.34 $90.03

Model courtesy of finbox

This model applies a revenue exit multiple to calculate terminal value after five years.

Upside Potential and Your Takeaway

GameStop may pivot its retail business by embracing the cloud infrastructure. Gamers are embracing digital downloads over the physical purchase of game titles. So, hiring Matt Francis in the chief tTechnology role should lift its prospects. The executive previously worked as engineering leader at Amazon Web Services.

GameStop also hired Kelli Durkin. She will join as the senior vice president of customer care. Josh Kreuger will join as VP of fulfillment.

The short-squeeze play continues for longer than bears would like. In the long term, this retailer’s fundamentals are showing potential upside. Its stock price will reflect that.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

Article printed from InvestorPlace Media, https://investorplace.com/2021/02/gme-stock-gamestop-short-squeeze-continues/.

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