In late January of 2021, something weird was happening on the stock market. GameStop stock—a retailer on the brink of collapse—saw its stock shoot way, way up in value. Panicked hedge funds that had bet big on GameStop going under suddenly founded themselves caught in one of the biggest short squeezes in Wall Street history.
The run on the stock, fueled by individual retail investors from the Reddit forum “Wall Street Bets,” caused the price of a single share of GameStop to skyrocket. Chaos erupted as small-time stock market amateurs took on Wall Street… and won.
The saga sparked discussions about the legality of aggressive short selling, the nature of social media in relation to the stock market, and just how much damage a dedicated online community could do to an established hedge fund when conditions lined up perfectly.
This is the incredible true story of the GameStop short squeeze, a legendary battle of David and Goliath that played out in front of the eyes of the world.
The Rise and Fall of GameStop
GameStop dominated the retail video game market for nearly three full console generations. Kids in small towns across the United States gathered at GameStop to talk about video games with knowledgeable staff. The company became a staple of the industry, offering pre-order bonuses for new games and fueling a retail landscape that prioritized players trading in their used games for store credit.
This business model was successful until around 2016, when digital distribution began to overtake the brick-and-mortar retail shops. Why get in the car and drive out to GameStop to buy a game when you could just download it for the same price without leaving your house?
The company’s stock price began to tumble from mid-2015 highs of $50 per share down to just under $30 per share in February of 2016. By this point, industry analysts predicted that the company’s days were numbered, and large hedge funds like Melvin Capital were eyeing GameStop as a candidate for a short sale.
Short Selling
Let’s talk about short selling. It’s a tactic by which an investor hedges their bets that a company is going to fail. The mechanism for short selling is somewhat complicated, but the simple version is that an investor borrows a stock from a stockholder and then sells that stock immediately. Later, the investor buys that stock back to “cover” their “short.” Ideally, they are able to buy the stock back at a much lower price than they initially sold it for, putting cash in the investor’s pocket.
In a nightmare scenario for the investor, the stock could begin to climb quickly instead of failing. This causes short sellers to scramble to cover their positions, battling to buy up the stock they need to pay back their loans.
This sudden surge of demand for the stock drives the price up further, which is known as a “short squeeze.” A squeeze can cause short sellers to take essentially uncapped losses because there is no upper limit to how high a stock’s price can get.
Short selling, also known as “put contracts” or “put positions,” is legal, but it’s a risky endeavor. A group of retail investors who share stock tips on Reddit were about to prove exactly how risky short selling can be.
Wall Street Bets
By 2019, GameStop was struggling as sales plummeted and CEOS came and went. There were rumblings on the r/WallStreetBets (WSB) subreddit forum that GameStop’s stock was being severely undervalued at eight to ten dollars a share.
A prominent user on the site, DeepF—ingValue (censorship ours) shared his aggressive call option on GameStop in the Summer of 2019. A call option is essentially the opposite of a put position; it’s a bet that the stock in question will do well in the future.
DFV, as the community knows him, was roundly scolded by WSB members for this position. He defended his investment, insisting that GameStop was being undervalued by analysts. At this point in time, mainstream analysts were largely betting on GameStop to be yet another retail victim of shifting technology, much like video rental service Blockbuster before it.
By the following year, it seemed like DFV had made a huge mistake. GameStop stock dropped to new lowson March 19, 2020, when the company announced that its stores were “essential retail” and should remain open during the pandemic. GameStop was widely ridiculed over this move, and their stock price tumbled to an abysmal $4 per share. By March 30, the impact of the shutdowns was being felt all over the market, and GameStop’s stock hit its all-time low of $2.57 per share.
At any other moment in history, this story would have ended with GameStop closing its doors for good and Wall Street hedge funds walking away with millions from their short sale. But instead, a man named Ryan Cohen changed the narrative.
Who Is Ryan Cohen?
Ryan Cohen founded a company in 2011 called Chewy that sells pet food and supplies over the internet. He was also a major investor in GameStop.
On August 18, 2020, Ryan Cohen filed a 13D form that showed he had an eye-popping 5.8 million shares of GME (the market abbreviation for GameStop stock). At the time, he had about a nine percent stake in the company.
On November 16, Cohen made an official statement to GameStop’s Board of Directors that he believed he would be able to transform the company from a retailer into a digital powerhouse, much like his previous company. In the official statement issued to the board, RC Ventures (Cohen’s company) explained, “GameStop’s leadership should immediately conduct a strategic review of the business and share a credible plan for seizing the tremendous opportunities in the rapidly-growing gaming sector.”
Gamestop stock was hovering around $12 at the close of trading that day. Meanwhile, mounting buzz on the WallStreetBets subreddit claimed that the GameStop stock situation was extremely weird, and that there might be an opportunity for a massive short squeeze.
The Actors Take Their Positions
On the same day that Ryan Cohen revealed his massive investment in GameStop, Melvin Capital filed a 13F form with the SEC that detailed roughly $55 million worth of short contracts on the retailer.
In early January 2021, Ryan Cohen took a seat on GameStop’s board of directors thanks to his roughly nine million stock purchase over the past few months. That day, GameStop’s stock closed at nearly $20. It seemed clear that Cohen—like DVF—believed GameStop could not only recover but thrive.
On January 19, just a few days after Cohen joined the board, popular Twitter user and stock advisor Citron Research promoted an upcoming livestream in which he would explain why GameStop would be failing shortly. That day, the stock shot up another ten dollars, closing at roughly $30. Why was the price continuing to go up despite so-called experts insisting the retailer was doomed to fail at any moment?
The WSB community caught wind of Citron’s strong anti-GameStop position and sensed the opportunity to pick an epic fight—something that the chaotic, meme-obsessed Redditors enjoyed more than anything. On January 21, Citron posted the promised video detailing his thoughts about the company and how its stock was being overvalued, meaning it was sure to crash very soon. WSB begged to differ, and this kicked off one of the most unbelievable short squeezes in human history.
Goliath, Meet David
Thanks to buzz from WSB and similar platforms, the squeeze was on. Amateur traders using platforms like Robinhood and E-Trade flocked to the stock, snapping it up in droves and forcing a showdown between short sellers and retail investors.
By the time GME had surpassed $150 per share on January 25, it had tripped the New York Stock Exchange’s circuit breaker nine times.
Put simply, the GameStop stock surge was one of the strangest flukes to ever occur in the Stock Market. Some WSB users became fabulously wealthy overnight, while Citron Research and Melvin Capital were both forced entirely out of their extremely aggressive short positions. The frenzy was only spurred on by Tesla CEO Elon Musk, who tweeted about the stock on January 26. By January 27, the stock hitting an unbelievable high of $380.
After the surge in January, the stock cooled off back to around $90 per share. This was far above where it had been for the last year. The price indicated that investors now had significant confidence in Ryan Cohen’s ability to fundamentally transform the company into a digital distribution leader.
It all ended happily ever after for the underdogs—or so it seemed.
The Fallout
On February 16, redditor DVF was named in a class action lawsuit that claimed he misrepresented himself online as an amateur trader. DVF, whose real name is Keith Giles, has stated that he simply “liked the stock” and doesn’t feel as though he solicited anyone to buy or sell it for his own profit.
The lawsuit against Giles highlights the issue some took with the short squeeze: some regulators and established investors felt as though the WSB subreddit engaged in market manipulation specifically targeted at GameStop short sellers. Regulatory hearings throughout early 2021 heard testimony from some of the major players to find out if that was true. Giles himself testified before the House Financial Services Committee on February 18, characterizing the event as nothing more than an exceptional short squeeze, not an illegal market manipulation.
GameStop Stock Today
As of the time of this writing, GameStop’s stock price remains strong and was hovering over $220 per share at the end of May 2021. With the company’s quarterly earnings call on the horizon, some users on Reddit are predicting that the stock will stay strong.
Ryan Cohen will become the company’s CEO on June 9. If the active investing community on Reddit is to be believed, Cohen is likely to make good on his promises of transforming GameStop into a major player once again. As a result of Cohen’s presence, GameStop has hired other Chewy executives to the board and to upper management.
Amateur investors caused international headlines by squeezing short sellers out of their GameStop positions. Now, Cohen hopes to cause further headlines about GameStop’s stock price the old-fashioned way: By putting up huge sales numbers.
