Gamestop — how did we get here? 🚀

💎 🤌

I wanted to do a write-up to explain my experience and strategy regarding GME. Obligatory, I am not a financial advisor and this is not advice. However, I think it serves to benefit everyone if we share our thoughts. Additionally, I know there is a lot of noise about Gamestop right now, which might make it hard to find reliable information. I have been following this stock for a few months, so hopefully, the information I am sharing is helpful.

Some facts to start off with, there was a good reason to short Gamestop last year, Gamestop has been losing money for over two years. Their revenue and net income had been declining for 5 years, and of course, their share of the video game market was also declining (link). At the same time, the video game market has nearly doubled in size (link). Obviously, the brick-and-mortar strategy is a relic of the past, and successful modern retail companies have gone digital and have reduced costs.

So, the company was rightfully shorted. But the shorters went too far. They shorted more shares than were actually available. This happens when brokers allow shorts to sell shares that they haven’t even borrowed yet… (link). Early last year, Gamestop dropped down to a market capitalization (value) of less than $200M (now they are worth over $10B). At that point, the shorts should have cashed out, taken their profits, and moved on. They didn’t. They wanted Gamestop to go out of business, go bankrupt, and shut down (putting thousands of people out of work and selling the company for scraps).

While this was happening, Gamestop was shifting its strategy. They were closing unprofitable stores, they were paying off debt, they were expanding their potential market to include PC gaming, and they were beginning to sell more profitable, high-margin products (like Pop collectibles). And oh, I forget, they also bought back shares, reducing the number of shares available for shorts. At that time, u/DFV (wallstreetbets) and Michael Burry (the big short) took large stakes in the company, and the rumors began. This was the beginning of the end for the shorts. Fast forward a little bit to late 2020, Ryan Cohen — the person who took on Amazon and won — buys nearly 10% of the company. For those who don’t know, Ryan Cohen took a small e-commerce pet supply company, Chewy, and sold them to Petsmart for $3B (now they are worth $30B — Gamestop generates more revenue yet is only worth half that). He is Mr E-commerce and is expected to bring his e-commerce magic and millennial acumen to Gamestop. Read the letter that he sent to the Gamestop board, it is the most telling piece of support for the bullish thesis (link).

While all this was happening, shorts were doubling-down over and over and over again (like playing blackjack and doubling your bet every time you lose a hand to try to recover your initial investment). Fast forward to January. On the eve of a major conference for Gamestop, they pull out of the conference, and the next day they announce that Ryan Cohen increased his ownership and will be getting 3 seats on the Gamestop board — 1 for him and 2 for members of the Chewy team (link) — four other board members (who did not share RC’s vision) are leaving, making RC the biggest shareholder and giving him majority control of the board. This brings us to today.

We are at the start of a new console cycle with the new PS5 and XBOX Series X consoles (and rumored new Nintendo console). We are at the end of Q4 and expect the first year over year growth quarter in years, where Gamestop will be profitable (their Q4 ends at the end of January, so all this hype has definitely increased their revenue and will be reflected in Q4 earnings). This will add more cash to their balance sheet thus allowing them to implement their strategy and pay off more debt (not to mention the prospect of issuing shares for more money).

Regarding the shorts, they lose money if Gamestop doesn’t go bankrupt (which is impossible at this point), so shorts are really just trying to minimize their losses (and playing dirty to do so). In order to get out of their position, they need to buy all of our shares to cover their position (that is going to be expensive). That means you can pretty much name your price.

Some very important information. The shares that are shorted never expire, meaning the squeeze might not happen today, but it will happen soon because the shorts have to pay interest on their shares and there is growing pressure from market makers (the guys who write options contracts and have to buy shares to hedge) to make the shorts cover their positions. Today we could see a squeeze as all the call options that expire today are in the money (link) (literally every available call option is in the money) meaning that all the underlying shares will need to be purchased (nearly 20M) at a time when there are no shares available (now a lot of these shares have been purchased by prudent market makers, but there are a lot that will have to be purchased today and Monday).

That brings me to my strategy. I will be holding through today if there is no evidence of the vast majority of shorts covering. Until they cover, I am not selling. People like you and me are buying the shares at these high prices right now, and it should be the shorts who are forced to pry these shares out of our diamond hands.

None of this is financial advice. I own shares and call options in Gamestop. I first bought in on December 1st when Gamestop was worth $15/share. This is just me telling you about my experience thus far. I only hope that my experience and my outlook is helpful to you. The sky is the limit with this one.