Shares of American company GameStop, the largest retailer of video games and consoles, experienced a spike in volatility on Monday, which caused trading on the NYSE to be suspended 10 times. Analysts point to purely speculative growth and a demonstration of “the power of market newcomers.”
The rally in GameStop (GME), which began almost two weeks ago, represented the following situation.
As video game and console retailer GameStop has seen declining earnings and stock prices in recent years due to intense competition from streaming services and other companies, many short sellers have bet on the stock to decline.
However, on January 11, GameStop’s stock began to rally after the company announced the appointment of Ryan Cohen, an activist investor and co-founder of online pet store Chewy Inc. to its Board of Directors to double digital product sales.
GameStop is leading e-commerce sales and their growth is really high: 309% over the past year, but they do not yet play a key role in total revenue. GameStop’s earnings have been declining for the past 11 consecutive quarters. GameStop’s quarterly earnings and earnings statistics for the last 2 years are available here.
While there were no fundamental prerequisites for the advancement of GameStop shares, the shares rose almost 378% in 11 days: from $ 20.3 on January 11 to $ 76.8 on January 25, Monday.
The bottom line is that when betting on the fall in GameStop shares, the short sellers borrowed the shares in order to sell them at a higher price and then buy them back at a lower price. Due to the growth of shares against the background of the news on January 11, “short” sellers had to liquidate their positions, buying back shares at a price higher than their sale, while losing money. Bulk purchases sparked “artificial demand,” followed by many retail investors.
On Monday, the volatility of GameStop shares was so high that the NYSE had to suspend trading ten times: from Friday’s closing price of $ 65.2, on Monday during trading, the price reached both $ 159.2 (up 145%) and $ 61 ( a drop of 9.4%), finally closing with an increase of 18% and a price of $ 76.8.
Analysts at the investment firm Citron Research called such a rise insane, confirming the fact that there is no prerequisite for the growth of GameStop shares and that the stock “will quickly return to the price of $ 20.”
Market experts noted that the reason for the situation was the popularity of online brokers such as Robinhood, which give inexperienced investors and newcomers to the market the opportunity to trade in the market without commissions.
GameStop was “the latest showcase of the power of newbie day traders in what they see as a game every day.”
On Monday, Telsey Advisory Group analyst Joseph Feldman, who rates GameStop shares at the highest target price, downgraded their rating by two positions at once: from “superior” to “worse than the market” (“underperform” – the rating is worse, in general, than “neutral”, but better than “selling”).
Of the eight analysts covering the stock, four give a hold and the rest recommend a sell, with an average target price of $ 12.50, predicting an 85% fall from current levels.