Is GameStop Stock A Good Buy Or Is Its Rally Just A Short Squeeze?

GameStop is defying all logic in its surge to all-time highs, and investors need to be careful about what they're getting into.
Jan. 26, 2021
Unlock Free Stock Insights + 50% Off Discount Code!
Join thousands of savvy investors and get:
  • Weekly Stock Picks: Handpicked from 60,000 global options.
  • Ten Must-Have Stocks: Essential picks to hold until 2034.
  • Exclusive Stock Library: In-depth analysis of 60 top stocks.
  • Proven Success: 10-year track record of outperforming the market.
Sign up to our mailing list now and enjoy a 50% discount on premium services!
By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Policy and Terms of Use.

You know, when I covered GameStop's ridiculous 60% single-day growth less than a fortnight ago, I figured that it would be the last crazy day for a while. How wrong I was...

Though the previously beleaguered business was up as much as 150% yesterday before falling back to earth, it did still manage to close at an all-time high of $76.79 per share, despite not actually having done anything. In fact, sales growth has been sluggish in recent years as fewer gamers need to go to stores -- or even shop online -- when they can download new titles directly from their consoles, PCs, phones, or tablets instead. Then a couple of weeks ago, GameStop revealed that e-commerce sales were up 300% over the holiday period, same-store sales grew 5%, and some new specialist directors were joining its board.

Suddenly, the stock was soaring and short-sellers were losing a lot of money. What followed was what's known as a 'short squeeze'. And while GameStop may appear to be a stock on the rise right now, before rushing out to buy a piece, you should know that short squeezes don't last forever.



What is a short squeeze?

Probably important that you know that:

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price. If you need to know more about short selling, you can read about it in our blog here.

For now, however, it's important to understand the unique position that GameStop finds itself in, for which we must go back to last week when short-seller firm Citron's founder, Andrew Left, called GameStop a "failing mall-based retailer". In rode the Reddit cavalry to GameStop's rescue, as bullish gamers took this short-seller report to heart and decided to pump GameStop stock.

Because of this, short-sellers have lost $3.3 billion betting against the stock in 2021 so far while GameStop is up almost 500% in the same period. It's all a little bit nuts and shows the frightening power that Reddit, Fintwit, and even TikTok investors now hold in this day and age. A company like GameStop, with falling growth, mediocre sales figures, and generally poor fundamentals, can be pumped up to unsustainable prices just because some Reddit groups decide to stick it to the short-sellers. 

Don't get me wrong, it's nice to see a struggling business get a boost like this, but there is a danger here. Once vulnerable short-sellers exit their positions and opportunistic traders take their profits, GameStop's stock price will plunge. In fact, given that its price yesterday fell from a morning high of $159.18 per share to close at $76.79, this dynamic may already be occurring.

A MyWallSt subscription gives you access to over 100 market-beating stock picks and the research to back them up. Our analyst team post daily insights, subscriber-only podcasts and the headlines that move the market. Get your free access now!


MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here


Unlock Free Stock Insights +50% Off Discount Code!
Join thousands of savvy investors and get:
  • Weekly Stock Picks: Handpicked from 60,000 global options.
  • Ten Must-Have Stocks: Essential picks to hold until 2034.
  • Exclusive Stock Library: In-depth analysis of 60 top stocks.
  • Proven Success: 10-year track record of outperforming the market.
Sign up to our mailing list now and enjoy a 50% discount on premium services!
By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Policy and Terms of Use.

The Home of Successful Investing.

© 2024 MyWallSt Ltd. All rights reserved.


Services

Content

Social

Company

Support

Resources


This website is operated by MyWallSt Ltd (“MyWallSt”). MyWallSt is a publisher and a technology platform, not a registered broker-dealer or registered investment adviser, and does not provide investment advice. All information provided by MyWallSt Limited is of a general nature for information and education purposes, and you should not construe any such information as investment advice. MyWallSt Limited does not take your specific needs, investment objectives or financial situation into consideration, and any investments mentioned may not be suitable for you. You should always carry out your own independent verification of facts and data before making any investment decisions, as we cannot guarantee the accuracy or completeness of any information we publish and any opinions that we publish may be wrong and may change at any time without notice. If you are unsure of any investment decision you should seek a professional financial advisor. MyWallSt Limited is not a registered investment adviser and we do not provide regulated investment advice or recommendations. MyWallSt Limited is not regulated by the Central Bank of Ireland. MyWallSt Limited may provide hyperlinks to web sites operated by third parties. Your use of third party web sites and content, including without limitation, your use of any information, data, advertising, products, or other materials on or available through such web sites, is at your own risk and is subject to the third parties' terms of use.