Why are people buying GameStop stock again? GME’s dramatic repeat share price rise explained

Andrew Griffin@_andrew_griffin
Friday 26 February 2021 09:00
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GameStop stock frenzy: An explanation

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GameStop’s share price is surging once again – and though it’s not clear exactly why, it’s possible Reddit and an ice cream cone are responsible.

It recalls the previous time the stock went haywire, a few weeks ago, during a short squeeze that sent the price of the shares up 1,600 per cent.

Just like that time, nothing much has happened to GameStop itself. It continues to undergo trouble as a company – hit by a move away from hard copies of games, and the pandemic – but not in any particularly new way.

But also like that time, the rise has less to do with the company than the stock itself. The original cause of its new rise might be mysterious, but the dynamics at play are quite familiar.

As Wednesday began, it looked like any other day for the stock that has come to be best known as “GME” by its followers. It opened at just under $45 per share – vastly down from its highs during the GameStop affair a few weeks ago – and continued trading that way through the morning.

But after the market closed, it shot upwards. It was up more than 50 per cent by early Thursday.

It was not clear why such an event happened. The last time around, the rapid increase was driven by a “short squeeze” – because so many hedge funds had bet against the stock, technical trading dynamics meant that any increase in price would be accelerated by them covering their positions – but analysts ruled that out this time around.

Reddit, which hosts the “Wall Street Bets” forum that has become a haven for investors who support stocks such as GameStop and other nostalgic businesses, went down just as the surge was beginning. It was not clear whether there was any connection between the two events.

Read more: GameStop trading repeatedly halted after shares surge again

One explanation was a tweet from activist investor Ryan Cohen, who is a major shareholder in GameStop and was appointed as a board member as part of an attempt to reverse the company’s ailing fortunes.

Mr Cohen is known as “Papa Cohen” on the Reddit forum, and is known to have a significant holding in the company. That means that his tweets have a particular pull for those who follow the stock – even if they might be largely incomprehensible to others.

One such tweet was posted by Mr Cohen on Wednesday evening. It showed a McDonald’s ice cream cone and was accompanied by a frog emoji.

Soon after that post, the shares began to surge. It is impossible to say definitively whether there is any connection between the stock price and Mr Cohen’s tweet, but it at least focused new attention on the GME shares.

Once the run began, however, it became self-sustaining. Followers of the stock encouraged others to buy and hold it, in the hope that they could get some of the returns that were available last time around.

Given how famously well the shares did last time around, at least before the resulting crash, it is likely that any suggestion there could be a repeat performance will drive more people to buy the shares – itself pushing the price up.

“Bought lots more #GME today, let’s keep fighting !!,” wrote one Reddit user Fundssqueezzer, while another user Responsible_Fun6255 said, “Rise of the planet of the ape: GME edition”.

GameStop shares skyrocketed in January as retail investors, urged on by popular Reddit forum WallStreetBets, bought the stock as a way to punish hedge funds that had taken an outsized short bet against it.

The squeeze “personally humbled” Melvin Capital’s Gabriel Plotkin, whose firm was left needing a $2.75 billion dollar lifeline supplied by hedge fund Citadel LLC’s Kenneth Griffin and Point72 Asset Management’s Steven Cohen.

The risky trading strategies employed by some traders on Reddit have drawn the ire of investing legends such as Charlie Munger, long time business partner of Warren Buffett.

“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” said Munger, Berkshire Hathaway’s vice chairman.

GameStop‘s US-listed shares soared nearly 104% on Wednesday. The volatility in GME, AMC Entertainment and other stocks led to outages on Reddit and periodic trading halts by the New York Stock Exchange.

Online brokerage Robinhood said in a tweet that the NYSE action would impact all brokerages, but that it had not paused trading on the shares.

“It’s a pretty risky play to try and buy now ... what we might (see) at the open of the cash market is some people trying to get in,” said Oriano Lizza, premium sales trader at CMC Markets in Singapore, which does not offer pre- or post-market trade.

The latest surge comes after a couple of weeks that saw the shares move in relatively tighter ranges.

“It’s a marathon, not a sprint. Whatever happens resist the urge to sell. The longer we hold the higher it goes,” said @catchme1fyoucan, an Italy-based user of retail trading platform eToro, in a discussion on GameStop.

Additional reporting by Reuters

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