What is GameStop and why did it trigger a short squeeze

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What is GameStop?

GameStop is a gaming merchandise retailer founded in the suburbs of Dallas, Texas, in 1984, where it retains its global headquarters. At its peak in 2015, it boasted more than 6000 stores and $9 billion in annual sales. It retains a reduced retail presence, with stores in the US, Canada, Australia, New Zealand and Europe. Many of these stores carry alternative brand names, such as ThinkGeek, EB Games and Micromania-Zing.

GameStop also sells products directly through its website, offering toys, collectibles, apparel and accessories alongside its primary offerings of game consoles and titles. It allows customers to trade in their old consoles or games and customers can also buy pre-owned goods.

It has faced challenges from 2016 because of competition from digital distribution services and, in early 2021, was at the epicentre of a short squeeze, enveloping numerous securities traded on the New York Stock Exchange and the NASDAQ.

What is the history of GameStop?

GameStop was initially Babbage's, a Dallas-based retailer selling generic software founded by former Harvard Business School classmates James McCurry and Gary M. Kusin. Named after the 18th century ‘father of the computer’ Charles Babbage, its first store was in Dallas's North Park Center and the enterprise had financial backing from Ross Perot, who later achieved fame as a presidential candidate in the 1992 elections.

GameStop was quick to respond to its customers’ interests. It initially focused on video game sales for the Atari 2600, which dominated the nascent home gaming market, before adding a wide selection of Nintendo games when the Japanese brand entered the market with a vengeance in 1987.

GameStop went public in 2002 on the New York Stock Exchange and became fully independent in October 2004. The next 12 years proved to be a period of great success for the company.

It made a major acquisition when buying EB Games (formerly Electronics Boutique) in 2005 for $1.44 billion. This purchase transformed GameStop into a global operator in retail gaming. It made further strategic acquisitions across its new domains, continuing to focus heavily on bricks and mortar at a time when it was already becoming harder to retain profitability within retail.

How did GameStop’s decline begin?

GameStop began to struggle in 2016. With a business model rooted in selling retail gaming software out of stores, it had not looked closely enough at how brands such as Xbox, PlayStation, Nintendo eShop and Steam were beginning to offer downloadable digital versions of games which allowed gamers to continue to access new titles without leaving their consoles.

In early 2017, GameStop reported a 16.4% drop in sales for the 2016 holiday season, citing industry weakness, competitors pushing aggressive promotions, and lower in-store traffic.

By then, the GameStop share price was in trouble, having fallen 16% throughout 2016 and Microsoft’s announcement of its Xbox Game Pass service triggered another sharp sell-off in GameStop shares.

It announced the closure of 150 stores in 2017 and a desire to expand its non-gaming business. After continued failure to meet revenue estimates, it spent much of 2018 seeking a buyer and GameStop shares dropped sharply again in January 2019, hitting a 14-year low. Soon afterwards, GameStop reported a record-breaking net loss of $673 million.

How did GameStop respond to its challenges?

GameStop began to rethink how to position its stores, introducing bold plans in July 2019 to concentrate on competitive gaming, ‘retrogaming’ (modern versions of well-known games from previous decades) as well as a ‘try before you buy’ initiative. At the same time, it stepped up its offerings on non-gaming merchandise, including memorabilia and collectibles.

However, GameStop continued to miss analysts' expectations. In September 2019, GameStop announced plans to close about 200 underperforming stores of the 5700 that it owned at the time. Four directors stepped down and were replaced.

In general, 2020 was a very strong year for the gaming industry with many people stuck at home following global lockdowns in response to Covid-19. Roughly in line with the sector as a whole, GameStop shares trebled in value between August and the year end – but this was nothing compared to what was to come.

How did the GameStop short squeeze happen?

The GameStop short squeeze was thought to have been primarily triggered by users of the subreddit r/wallstreetbets along with other online trading forums. These channels are populated by young traders, who are adept at quickly building mass awareness of an opportunity to buy a cheap stock. Often, they specifically consider stocks that many institutional investors and hedge funds are short-selling.

In the case of GameStop, the interest from these forums was also based on a legitimate belief the stock was undervalued. On 11 January 2021, GameStop announced it had added three new directors to its board, including Chewy co-founder Ryan Cohen. Investors liked that Cohen brought digital experience to the table, something that it was clear the company was in desperate need of.

On January 4, the first trading day of 2021, GameStop shares traded at $17.25 before doubling in value over the course of the next 10 days. It was towards the back end of the month that the stock rocketed, going from $77 a share to just shy of $350 in two days before briefly hitting a high of $500 per share early on January 28.

This triggered large losses for short sellers as they rushed to cover their positions, thus driving the price higher. The GameStop short squeeze was emblematic of the power of social media and no-fee trading apps to drive up the price of shares and ‘take on’ short sellers.

Related tags: Stocks Insights

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