Video game retailer GameStop (GME) is the most famous of the so-called meme stocks. How a small, struggling company became both a stock market sensation and transformed its future reflects the rising power of retail investors and how they can help transform companies. This is its story, so far.
The background struggle
GameStop was well known to consumers, given its 5,500 brick-and-mortar retail stores in the malls and high streets of the US, Canada, Europe and Australia, selling video games and consumer electronics. It was also known to investors, ever since it was founded in 1984 as Babbage’s, and publicly listed since 1988. But it was small and struggling, and was being left behind as the industry rapidly transformed to an online e-commerce model. This made the company consistently unprofitable between 2017–2020 with its share price plunging to an April 2020 low of under $3 a share. This near 90% fall from over $25 a share only three years before, took its market capitalisation well below $1 billion, making it a minnow in the US equity markets.
The strategy pivot accelerates
GameStop reported third-quarter results on December 8th, 2020. The market focused on the company’s accelerating problems, as mounting competition from online was exacerbated by the Covid pandemic which saw it temporarily close most of its stores. Its sales sank over 30% versus the same period the prior year as retail video game demand fell and the company closed 11% of its stores. This drove a $63 million loss and a 20% share price plunge. But the report also highlighted a bright spot, with e-commerce sales rising over 250%, that was to become the increasing focus of the company.
To accelerate its strategy to pivot to online sales, the company appointed three new board directors on January 11th, who had together built the successful online pet product retailer Chewy (CHWY). This included its founder and CEO, Ryan Cohen, who had started to build a 13% stake in GameStop on his way to becoming its largest shareholder. He had started Chewy in 2011 and sold it to Petsmart for $3.5 billion in 2017 when it was generating over $2 billion in revenue with an estimated 50% share of the online pet supply market.
The rally really starts
The GameStop share price quickly jumped over 50% after the announcement that the ex-Chewy management team had joined the board of directors. This rise was further driven by a surge in the growing discussion of the company among the 2 million subscribers (now 11 million) on the online message board r/wallstreetbets.
The second ingredient to the rally was a so-called ‘short squeeze.’ This is when a stock’s share price rises (often pushed by retail investor buying), forcing investors (usually hedge funds) who had been positioned for the stock to fall (they were ‘short’), to have to reverse course and buy the stock. This in turn, drives the stock up even more. See our article What is a ‘short squeeze’ for more!
In the case of GameStop, the hedge fund’s gigantic short position famously reached over 100% of the company’s total shares, as they saw little fundamental reason for the stock to rise and they bet it would collapse. But the share price continued to rise, fuelled by the online investor community, forcing the hedge funds to buy back their positions, and driving the rally even more. David had vanquished Goliath.
Attention went mainstream as the stock surged. Everyone from Elon Musk to Chamath Palihapitiya tweeted about the stock, short-sellers from Citron Research to Melvin Capital were publicly humiliated, the GameStop rally was discussed at the White House press briefing, and a movie deal was struck for the story. The stock price reached an intraday high of $483 on January 28th, up 2,300% in only a month. The meme stock phenomenon was born.
The aftermath and securing its future
The stock subsequently plunged back to $40 per share in February, as the initial online euphoria faded, before recovering to trade in a wide $150–300 range in the following months, still many multiples higher than its $20 level of early January.
The increased interest in the company and its higher stock price allowed the company to move to secure its future. It raised a total of $1.7 billion in cash and attracted new management, as it moved to accelerate its turnaround plans. Amazon executives Matt Furlong and Mike Recupero joined as the new CEO and CFO, as a clear-out of old management also saw new heads of growth, technology, and operations hired.
Meanwhile, the company raised a total of $1.7 billion in cash by selling new shares in April and June to help fund its transformation plans — including more investment in new products, US fulfillment centres and improved customer service — and to fund the company’s losses until the plan worked. At the same time, Ryan Cohen solidified his position at the company, and was named Chairman of the board of directors in June. The level of retail investor interest remained very high throughout, illustrated by the 63% of GameStop shareholders on the eToro platform who voted at the June shareholders’ meeting.
The conclusion….so far
Whilst the jury is still out on whether GameStop’s business transformation will be successful, the impact of the meme stock phenomenon is not. Hedge funds have been vanquished, the newfound power of retail investors seen, the stock price remains ten times higher than its January 2020 level, and this has allowed the company to raise $1.7 billion in cash and attract a new management team to accelerate its business transformation.