GameStop Stock Explained: Robinhood, Short Squeezes, And Reddit

GameStop's stock has become a battleground this past week, as you've likely seen on social media. The ongoing feud between short-seller Citron Research and Reddit trading community r/wallstreetbets has made mainstream news at this point, with politicians like Elizabeth Warren weighing in and the White House officially "monitoring" the situation. GameStop's stock price continues to fluctuate wildly and has gone both up and down over the last several days.

Those not familiar with the stock market might be wondering, what exactly is going on here, and why is the price continuing to soar? Read on for a more in-depth look at what's behind the massive increase in GameStop stock price. Most recently, Discord banned the WallStreetBets server, citing "hateful and discriminatory content," and denying the suspension has anything to do with the ongoing financial feud.

How it started

GameStop's stock sat well below the $10 mark for most of 2020 until August, when Chewy founder Ryan Cohen bought a large number of shares, pushing the price up. After becoming the company's largest private investor, Cohen tried to discuss changes to the company with management and later ended up sending a letter to the board detailing how the company could be turned around.

In the letter he noted that GameStop's stock was one of the most shorted around, referring to short selling, a practice where investors can sell borrowed stock that they think is going to decrease in value, then buy back at a lower price, thus keeping the difference as profit. It's been a strategy for years and is even the subject of the book and film The Big Short, as it was used during the subprime mortgage crisis.

Shorting thwarting

In January this year, Cohen joined the board of directors, which led to renewed faith in the stock from analysts and investors--and a big problem for short sellers. In a process known as a "short squeeze," short sellers were forced to buy back stock, bailing out on their gamble before prices rose too much. In Melvin Capital's case, it has sold out of GameStop completely as of January 27. However, previous speculations that the firm would file for bankruptcy are apparently not true. Other hedge funds could find themselves in similar trouble soon. According to Reuters, losses from short positions have topped $70 billion. More than 5,000 firms had losses from shorts as of Wednesday.

The Dow Jones is down overall, possibly as a result of this, with investors having to move around money in order to cover the short bets they had on GameStop. It appears something similar could be on the horizon for AMC movie theaters, which has been struggling during the pandemic and has been heavily shorted.

At this point, the stock was picked up by r/wallstreetbets, a subreddit that describes itself as "like 4chan found a Bloomberg terminal." (The community's Discord server was eventually banned this week due to hate speech violations, according to Discord. You can read the company's full statement on The Verge.) As quoted in a Wired article, one of the subreddit's mods said the GameStop stock was "a meme stock that really blew up." The subreddit has over 2 million members, and in the past has been known to drive rallies in unexpected stocks such as Lumber Liquidators and Plug Power, gaining the attention of the financial world at large.

Never tell them the odds

The true conflict over GameStop stock began when short sellers Citron Research tweeted saying that "GameStop $GME buyers at these levels are the suckers at this poker game," predicting that the stock would soon go back to $20. The tweet amassed over 1,400 replies, mostly from GameStop investors who disagreed with the position.

Citron later delayed a livestream, saying that people were trying to hack its Twitter, with managing partner Andrew Left later saying that Citron would stop commenting on the stock altogether due to ongoing harassment, as reported by Bloomberg. Left did still post a YouTube video listing five reasons to sell GameStop stock, which denied that the stock was seeing a short squeeze, and pointing out GameStop's declining sales and high levels of debt.

Most analysts place GameStop's value around $12.50 a share with high estimates topping at $22, well below the $65 it closed out last week at. Were WallStreetBets not involved, there would be almost no chance of the shares being that valuable. But it's unclear how long it will take them to get back to their true value. That is, if they ever drop that low at all.

Making a statement

For members of WallStreetBets, however, the stock is about more than just money--they see it as a win against the "fat cats" of Wall Street. "What I think is happening is that you guys are making such an impact that these fat cats are worried that they have to get up and put in work to earn a living," a message by the subreddit's moderators reads.

To start out the week, the trend appeared to be continuing. The stock price continued to surge, topping out at over $158, but then dropped significantly, bottoming out at below $70 before beginning to recover slowly. On Tuesday, January 26, we saw another steep increase, as the price approached $150 at the end of the day. On the morning of January 28, it had peaked at well over $400.

It could climb higher ... or crash completely

It's a staggering turnaround for a stock that was priced at just over $4 last summer, but at this point it's unclear where it may end up once the ongoing short game is over, or how much longer this bubble will last. GameStop's recent store closures and continued trouble during the pandemic certainly don't point to a continued and sustainable rise in its stock prices. The company has failed to address the growing number of games being purchased digitally, though it has partnered with Microsoft to get a share of profits on digital sales if the Xbox consoles were purchased through GameStop. Whether this can have much tangible impact remains to be seen.

According to White House Press Secretary Jen Psaki, new President Joe Biden's team is "monitoring" GameStop's current situation. We've also heard Elizabeth Warren say she wants a more thorough explanation of what the SEC is doing about it. She mentioned the "wild levels of speculation" that don't help either the average person working at GameStop nor its customers.

Citron Research seemed to take issue with this. In what it called its "first political tweet," the short seller said the White House should have "more pressing issues" to deal with.

GameStop stock did take a substantial dive on January 28 after climbing for most of the morning. It's unclear exactly what caused it, but as it had previously passed $420, it's possible investors began selling as a joke. It has gone through large dips and peaks since then. At one point, it finally dipped below $100 and has been steadily declining overall since then. However, it's still exponentially higher than it was just a few weeks ago.

The SEC has also weighed in on the matter, saying the commission will continue working to "protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation."

Robinhood hits the pause button

As of January 28, the stock-trading app Robinhood has stopped letting traders buy certain stocks, including GameStop and AMC. The company said the move was made "in light of recent volatality." Webull, M1 and Public removed restrictions that afternoon. Webull cited an outside settlement firm as the reason for the freeze, saying it saw rising costs to settle trades.

Robinhood later announced a partial listing of the freeze for January 29. Some of the stock in companies like GameStop will be available for purchase again. However, it isn't going to lift the restrictions completely, apparently because of its volatility, which could still draw the ire of potential buyers. A similar pause was put on buying cryptocurrency using funds made as "instant deposits," which stopped newer investors from getting in on the Dogecoin craze. This came several hours after limiting GameStop stocks' sale.

How volatile is it? Based on past history, some experts think GameStop's share price could rise into the thousands. It did, however, dip shortly after this freeze was made.

US congressperson Alexandria Ocasio-Cortez took issue with the freeze, saying she would support a hearing to look into it. She criticized the "decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."

Even Ted Cruz, who disagrees with Ocasio-Cortez on virtually every issue, posted that he shared her views on this.