The recent boom to GameStop’s stock price is unrelated to its financial strength, but it may provide the company a chance to stave off bankruptcy.
The recent boom of trading and resulting fluctuations of GameStop‘s stock price could actually save the company from bankruptcy, according to one market analyst. Even though the store has struggled over the past few years, closing nearly 800 GameStop locations in 2019 and 2020, the company’s value has never been higher, thanks to a coordinated effort from the subreddit WallStreetBets.
At the end of 2020, members of the subreddit saw certain hedge funds had taken a massive short position on some stocks, including GameStop. The Redditors agreed to buy up shares of GameStop stock, despite no change to the company’s financial prospects, in an attempt to “short-squeeze” those hedge funds. These hedge funds had borrowed and sold stocks, betting they would be able to rebuy them later at a lower rate. However, with more average people buying the stock the price went up instead, forcing the hedge funds to buy those stocks at a much higher price to return the ones they borrowed. While it was initially restricted to a few Redditors, the price exploded when Elon Musk backed the move on Twitter. The end effect is that hedge funds will take massive losses when they buy back the stock, driving up the price even further, and giving more wealth to the Redditors who bought into GameStop. While this has been an earnest attempt by average Redditors to make a quick buck while also throwing hedge funds into chaos, it may actually save the gaming retail company.
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According to DailyFX analyst Peter Hanks, this short squeeze and the subsequent booming stock price “might allow GameStop to raise more capital by offering shares, granting GME the opportunity to stave off bankruptcy or even implement some of the changes to its business operations that early buyers of the stock were clinging to as bullish catalysts in the first place.” Ironically, it appears GameStop’s failing business model might be saved by the opportunity created by hedge funds that were betting against the company. Already, the sudden price explosion has caused brokers like Robinhood to halt trading and prevent users from buying more shares of GME. Both the Biden administration and the SEC have stated they will be monitoring the situation.
While many commentators and analysts have compared the GameStop short-squeeze to gambling, this massive fluctuation may give GameStop the capital to save itself. It is unlikely that, even after GameStop re-invests any capital into its own business model, the stock price will remain as astronomically sky-high as it has been the past few days. However, jobs will be saved by GameStop not going bankrupt, and some of the stock value can be somewhat recuperated. The eventual crash will be painful to both average traders and hedge funds alike, but it’s possible when the dust settles that GameStop, the pawn in this game, may have a slim second chance at recovery.
Source: Peter Hanks/Daily FX
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