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

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.

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