Tag Archives: Gamestop

New Stimulus Checks Could Set GameStop Off Like Never Before

With the House about to approve another $1.9 trillion in stimulus, the final hurdle before the legislation is signed by President Biden, I found myself wondering what this means for shares in GameStop and other meme stocks.

Those stocks took off big time in January, as personal income increased 10% month over month. Most Americans received a $600 stimulus check in December of 2020. A couple weeks later, shares in GameStop, AMC and others took off.

That stimulus is dwarfed by the new one, which will mean $1,400 checks for most Americans along with expanded unemployment, child tax credits, and other benefits. If a $600 check set meme stocks on a tear, what will $1,400 do?

Indeed, the expectation of stimulus payments may already be boosting GameStop shares, and may continue to do so in the future:

Market strategists have said tens of billions of dollars of U.S. President Joe Biden’s coronavirus relief package could indirectly find their way into shares, possibly boosting “meme stocks” that are heavily promoted by retail traders in online social media forums such as Reddit’s popular WallStreetBets.

My view of this company is that it’s lacking in fundamental value and should be avoided. However, it definitely wouldn’t surprise me if the stimulus gave the shares a short-term pop. The question is, how long will it last? You don’t want to be left without a chair when the music stops.

For more on GameStop and other meme stocks, check out these posts:

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GameStop May Go Broke Before It Can Reinvent Itself

GameStop shares are surging again today, even as the company is losing hundreds of millions of dollars a year.

The stock is reacting to Chewy founder Ryan Cohen beginning a push to transform GameStop into an e-commerce business. But it still has 5,000 stores that were losing a fortune even before COVID. And they won’t be easy to get rid of.

Commercial leases typically last for several years, unlike residential ones. But what exact terms is GameStop bound by? This morning, I made it my mission to find out.

The most recent info I could find was from their 2018 annual report:

Store leases typically provide for a lease term of one to five years, plus renewal options

That means this store-centric business model that is losing a fortune is locked in for years. Whatever Mr. Cohen does, it won’t take effect for quite some time, and the company could be out of cash by the time it happens.

GameStop lost $300 million in the first 9 months of 2020 and had only $600 million in cash left. They could be out of money 18 months hence at that rate, or about 1 year from now. That’s long before these money-losing leases expire and free them to pursue a better business model.

Their best course of action is to take advantage of their high-flying stock and issue a lot more shares. That war chest should be used to wind down all physical stores and completely focus on their e-commerce business, which is actually growing very quickly.

Such a plan would dilute existing shareholders significantly though, so for current GameStop shareholders, it’s hard to see a happy ending to this story.

For more on GameStop, check out these posts:

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GameStop Is Surging, But Are They Willing To Make Hard Changes?

GameStop Corp. shares are surging today and are currently up over 30%:

Chewy co-founder and GameStop board member Ryan Cohen is taking a bigger role, which is driving today’s gains:

GameStop Corp. shares extended their rally after the company tapped Chewy.com founder Ryan Cohen to guide its transition to an e-commerce business.

Cohen, a director at the video-game retailer, will chair a new board committee tasked with the transformation, the company said in a statement Monday, confirming an earlier report by Bloomberg News.

But GameStop is still losing hundreds of millions of dollars a year, continuing a trend that predates COVID. It has 5,000 stores that are dinosaurs in an e-commerce driven world. Formation of a committee is nice and all, but this doesn’t mean any real change right now. And certainly not enough to make a money losing, moribund company worth 30% more than it was yesterday.

Even if they decided to close all their stores tomorrow, they’d still be on the hook for years’ worth of rent. A typical commercial lease lasts 3-5 years, locking in this cash-incinerating business model for quite some time.

For more on GameStop, check out these posts:

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28% Of Americans Bought Meme Stocks in January

I came across a shocking fact this morning: 28% of Americans bought a meme stock like GameStop or AMC in January:

Over a quarter of American adults say they bought GameStop (GME) or another viral stock in January, according to a new survey from Yahoo Finance and The Harris Poll.

All in, 28% of Americans say they bought one of these viral stocks, the Yahoo Finance-Harris Poll found.

AMC was the most popular, closely followed by GameStop and then Blackberry:

In relative terms, 35% of people who bought one of these stocks bought AMC, 33% bought GameStop, and 23% bought BlackBerry.

And they went beyond just buying the stock, getting into sophisticated and potentially risky strategies like options and buying on margin:

Meanwhile, 29% used conditional trading like a limit order, 22% bought call options, and 15% bought with margin — borrowing money to get in.

The people using these sophisticated techniques were largely novice traders:

The survey found that 43% of the people who said they had a brokerage account had signed up within the past month, an enormous uptick that matches Google trends results that showed that more people were googling “how to buy stocks” than ever before.

More here.

I see real risk if novice investors buy heavily touted stocks with debt. They could lose a great deal. And the more they lose, the bigger the push for regulations to stop such speculation will be.

For more on the Wallstreetbets phenomenon, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

Congress Is Investigating Wallstreetbets Over GameStop, But the Law’s On Their Side

Congress is investigating whether traders on Reddit’s Wallstreetbets colluded to drive up the price of GameStop, possibily illegally. But two major legal precedents are on the side of Wallstreetbets:

In the DRW case, the CFTC argued the defendants’ orders for a swap contract were “inherently manipulative” because the defendants “understood and intended that their bids would affect the settlement price” of that contract. As the court summarized, the CFTC’s position was that the defendants “had intent to affect the prices, and because they had intent to affect the prices, that means [the prices] were illegitimate, which means that the prices were artificial.” The court rejected that logic as “circular,” concluding the government’s “theory, which taken to its logical conclusion would effectively bar market participants with open positions from ever making additional bids to pursue future transactions, finds no basis in law.”

More here.

The way I view this is people saying “You should buy GME!” on an online message board are exercising their free speech. Period.

For more on the Wallstreetbets phenomenon, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Bots Are Pumping GameStop And Dogecoin

Buy GameStop!

New research indicates that bots are pumping GameStop shares on Twitter, Facebook, and Instagram:

PiiQ said it identified very similar daily “start and stop patterns” in the GameStop-related posts, with activity starting at the beginning of the trading day, followed by a large spike at the end of the trading day. Such patterns are indicative of bots, said Aaron Barr, co-founder and chief technology officer of PiiQ.

“We saw clear patterns of artificial behavior across the other four social media platforms. When you think of organic content, it’s variable in the day, variable day-to-day. It doesn’t have the exact same pattern every day for a month,” he said.

The research firm, PiiQ Media, also found signs of robot activity in other stocks favored by the Wallstreetbets community, along with Dogecoin cryptocurrency.

Reddit claims it has seen no sign of bot activity, but anecdotally, I notice so many posts there that have basically no content. They just say “GME to the moon!” or what not. My gut tells me a lot of these are bots, but I can’t prove that.

For more on AMC and the Wallstreetbets phenonmenon, check out these posts:

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Photo: “Robot” by andreavallejos is licensed under CC BY-ND 2.0

For AMC, The Rent Is Too Damn High

As COVID forced AMC to close all its movie theaters in the spring of 2020, it played hardball with its landlords in order to survive. From a letter to landlords:

“Without revenue from its theatres,” the letter continues, “AMC will cease paying rent and charges under the lease effective as of April 1, 2020.”

Even with rent relief, the company lost $900 million in the first 9 months of the year, per their latest quarterly report. Things are looking a little brighter these days with many theaters reopened and people being vaccinated, but one small matter remains…

AMC owes almost half a billion dollars in back rent to landlords:

Getting through 2022 will require theater attendance to rise and that landlords further delay or reduce outstanding deferred rent owed by AMC, totaling $450 million.

AMC expects to negotiate these payments, but is still looking at a big expense increase. From its latest quarterly report:

commencing in 2021, absent further negotiations with landlords, the Company’s cash expenditures for rent will increase significantly following periods of agreed deferrals

And landlords may be less willing to give AMC a break since it just raised $1.3 billion in additional capital. But having lost $100 million a month last year, plus owing $450 million in back rent, how long will it take AMC to chew through that $1.3 billion? I question whether that cash hoard can last through 2021, especially since studios are giving AMC less time to run each movie exclusively before the studios stream it themselves:

AMC was able to negotiate an exclusivity window with Universal Studios before new movies hit Peacock, owned by Universal’s parent company Comcast. AMC wanted 75 days of exclusivity, they got 17. That’s only one major studio.

However, AMC does have two things on its side: a great management team that even furloughed itself to save money, and a high stock price that could let the company raise more capital.

That said, given the company’s big obligations and increasingly diluted stock, I’ll be cheering for them from the sidelines.

For more on AMC and the Wallstreetbets phenonmenon, check out these posts:

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Photo: “The Rent is too Damn High.” by TenSafeFrogs is licensed under CC BY 2.0

Second Short Squeeze Is On As GameStop Triples in 1 Day

GameStop shares have tripled in under 24 hours. Naturally, the blue chip investors behind the rise had a solid case for their optimism. After all, what about the ice cream cone?

Believe it or not, a GameStop board member posting a picture of a McDonald’s ice cream cone is one theory being bandied about to explain the red hot rally. Maybe it’s a sign? Or…maybe he just likes ice cream.

Also, the CFO was pushed out shortly before this rally, but it’s entirely unclear what that means for the company’s strategy.

There is no case for this rise based on the fundamentals, but there may be a technical one. I wrote about the possibility of a second short squeeze recently, and it may be happening. Shares short as a percentage of the float (stock that can be traded without restrictions) remains at 78%. Short sellers are losing a fortune:

Short-sellers are estimated to have lost $818 million on Wednesday from their bearish bets on videogame maker Gamestop

That’s losses of around 6.5% of the company’s entire market cap, in a single day. Ouch. (If you’re unfamiliar with short squeezes, check out this post for a quick explanation.)

But with repeated halts in GameStop trading and the fact that Robinhood could block buying again, it’s going to be hard for Wallstreetbets to wring the most out of this trade.

And either way, buying into a company with weak fundamentals just because there may be a short squeeze and the price could head higher is a very risky proposition. You don’t want to be caught holding shares in a moribund company once the short squeeze dissipates. And that could happen at any time.

If you’re interested in GameStop and the Wallstreetbets phenomenon, check out some of these posts:

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Payment for Order Flow Really Does Help Investors, Research Indicates

Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0

There Could Be Another GameStop Short Squeeze, But Beware Weak Fundamentals

GameStop shares have come back to earth since the short squeeze a few weeks ago:

But this story may not be over. GameStop remains one of the most heavily shorted stocks in the entire market:

This tells me that the epic short squeeze could happen again. Many short sellers still have their position. Maybe they’re wary of closing it out for fear their buying would set the stock on another upward tear? (If you’re not familiar with short squeezes, see this post for a brief explanation.)

But Redditors should be careful because the fundamentals of this business are weak. And you don’t want to be stuck holding a rotten stock if the squeeze doesn’t happen.

GameStop has 5,000 stores. Why? Where do you buy toilet paper, pillows, or plates today? Probably online, and videogames are going the same way. Publishers are selling them directly to the public online, and in general, people are losing the habit of going to physical stores.

If you got your games virtually or delivered from Amazon when stores were closed, why would you go back to the store once it’s open? You’ve already been forced to build a new habit by the lockdowns, and people don’t change habits readily.

And let’s not blame the lockdowns for everything. COVID only accelerated an existing trend. GameStop’s business has been shrinking for some time, and losses were actually even bigger in 2019. From Nov 2019 to Oct 2020, sales dropped from $4.3 billion to $3 billion, per their latest financial report.

Management talks about increasing online sales, and has had some very real success in growing that business:

…e-commerce sales, which increased 257.4% and 432.9% in the current quarter and year-to-date periods, respectively, compared to the prior year periods.

But where is the discussion of abandoning all physical stores? Why do those 5,000 stores make any sense in today’s environment? It’s a business model created in another time that made sense then, but doesn’t today.

When one part of your business is growing very fast (e-commerce) and another is producing consistent losses (stores), it’s pretty clear what you need to do. But I don’t see a willingness at GameStop to make those hard choices.

I get the impression management is really trying. When things got really tough in spring 2020, the top executives and the board took big paycuts of 30-50% (generally larger than those taken by hourly staff) and sold the corporate jet. That’s the kind of self-sacrifice you want to see from top leadership in a crisis. But can they bring GameStop to a new business model? I don’t see a lot of evidence of that yet.

Two months ago, before it attracted the attention of Wallstreetbets, GameStop was trading around 15. It could easily return there, based on the fundamentals. Wallstreetbets better hope for that short squeeze, and soon.

P.S. Another big focus for the Reddit crowd has been pot stocks. See more info about why their position is weak, how favorite Sundial Growers may be headed for bankruptcy, and how insiders are taking big loans at Sundial.

P.P.S. Don’t you love that sign?

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