A Financial Advisor's Take on GameStop
Today on Market Vision, we're going to talk about GameStop.
This is not a recommendation to invest. Myself and my firm are not buying or selling this stock. This is absolutely not investment advice. In fact, if I were to say anything, it would be to steer away from what's going on with GameStop right now. But more on that later.
Let's talk about what's going on with GameStop because it's all the rage.
The stock has popped something like 600% in two trading weeks. It's being positioned as this battle of David versus Goliath, where the hedge funds - the big Wall Street Goliaths - have been shorting GameStop. Meanwhile, the rally is being driven by day traders and retail investors.
So it's this David and Goliath position, and the "Davids" seem to be slaying the Goliaths at the moment.
Can Meme Wars Keep Propping Up Dying Business Models?
Here's the issue. This is all smoke and mirrors. GameStop is the blockbuster video of games.
So, remember 10 years ago, 15 years ago, we all had Blockbuster Video? Back when we would go to get a CD, DVD, or VHS tape at Blockbuster Video? Well, today it's all on Apple TV or Google platforms. All of that is gone.
GameStop is to gamers what Blockbuster was to us. It's a dead model. It just doesn't really know it yet.
It's a zombie company, with too much debt, and a business model that has no legs to it. The hedge funds have been betting that they're going to end up in bankruptcy. And so they have been shorting the stock, effectively selling the stock today, hoping they can buy it back at a future date at a cheaper price and keep the profit.
The Great Reddit-GameStop Feeding Frenzy
Retail investors through some of these Reddit platforms and other retail investment platforms have jumped on saying, "Hey, we think they're going to not go bankrupt sooner. If they go bankrupt, it'll be later."
What they've done is they've jumped in and piled in, creating a little bit of a buying frenzy. Suddenly, the short sellers are underwater. If they don't want to stay in that trade, they have to buy the stock back to get out of their short.
That's created a bit of a cascading effect because a little more of those short sellers have to go buy the stock.
What you have is an extremely oversold stock with a company that doesn't have a long future ahead of it. Wall Street has been betting against it, but now, retail investors have created this feeding frenzy that's driven the stock way up.
Expensive Stock Prices Covering a Dying Business
Here's the question. Have they done anything to improve the underlying fundamentals of the company, or is it all just smoke and mirrors driving a stock up, driving the stock down?
People are going to get caught in the middle when they try to jump on a train like this. Then the gravy train ends and the stock crashes back to where it really probably should be. A much lower price due to a company model that is struggling with a lot of debt and trying to avoid bankruptcy.
The way I see it, this is the kind of boom bust.
On the other hand, here's what it's not. It's not what Anthony Scaramucci says, which is a justification for things like Bitcoin.
It's really just a study in the irrational behavior of crowds, where when crowds starts to pay attention to something, they go into a feeding frenzy on it, and can very quickly drive the stock price up. Just as quickly though, that reverses itself.
GameStop: Entertaining Headlines, Bad Investments
Let's not think that this is some fundamental, "Hey, we should buy and hold GameStop now that it's up 600%, and we should buy and hold it for the long run."
GameStop's business problems have not changed. Their stock price has, and a few people are going to make some good money on it, but it's hollow money. There's no earnings behind it, there's no dividends, there's no substantive business model behind it.
As always here at Visionary Wealth Management, we're here with perspective for the decisions ahead. If you have questions on this or anything else, please don't hesitate to give us a call. Have a great week.