GameStop's Roller Coaster: The Phenomenon Behind The Stock Surge

(Stephon voice): This week's hottest stock is GameStop. This stock has everything… Reddit memes, hedge funds getting kicked in the nuts, confused CNBC anchors, the New York Mets, Elon Musk… Even if you don't pay attention to the business world, you may have heard that something insane is happening with GameStop stock right now. GameStop, the deteriorating video game retailer typically found at equally deteriorating malls, has had a week on Wall Street that can only be described as a fever dream (and the week is only half over!). The stock has soared in a way that makes absolutely no financial sense for a company that lost $275 million in the last 12 months and is generally considered a modern-day Radio Shack. And no one is happier than the company's CEO George Sherman, a guy who has been on the job for less than two years.

[Disclaimer – I do not own any shares of GameStop and this article is in no way a recommendation to buy or sell shares in any stock.]

So what the heck is going on? Let's start with a one-year chart of GameStop's stock price (ticker symbol GME): It's essential to note that one year ago, a single share of GME would cost a little under $4. And now, as I type this article, a single share of GME costs you $324.28!

Understanding GameStop's Journey

George Sherman is the CEO of GameStop, having taken the helm in April 2019. At that time, GME was trading at around $10 a share, and two years prior, the stock had a value of $25. Upon becoming CEO, George Sherman was granted 2.3 million shares in the company, which were worth $23 million on his first day. However, the following year, those shares plummeted to around $7 million after the share price dropped to an all-time low of approximately $3. Not exactly A+ performance for a CEO!

As I write this article, George Sherman's 2.3 million shares are worth an astonishing $745 million. He isn't the only insider who finds themselves suddenly sitting on a massive fortune. Robert Lloyd, the company's former CFO, owns 534,000 shares. A year ago, those shares were valued at $1.6 million; today, they are worth $173 million. Similar fortunes have been seen by others in the company, including James Bell and Chris Homeister.

The Role of r/wallstreetbets

A guy on the r/wallstreetbets forum, known as "Roaring Kitty," shared a screenshot of his personal holdings. He infamously invested around $56,000 to build a stake of 50,000 shares through a mix of normal purchases and options. Today, those 50,000 shares are worth a jaw-dropping $16 million.

So what's causing all this chaos? The long story short (no pun intended) is that a "short squeeze" of epic proportions is being coordinated by a group of vigilante traders following the subreddit r/wallstreetbets. This phenomenon has become somewhat of a meme or a running joke for many individuals who join in "for the lols." Even Elon Musk, the world’s richest person, jumped on the bandwagon with a tweet reading "Gamestonk!!" linking to r/wallstreetbets.

The Mechanics of Short Selling

To keep things simple, until recently, GameStop was the most shorted stock on Wall Street. When a stock is shorted, the shorter is betting on the price to drop. Those with short positions only profit when the stock decreases, but there lies a risk of unlimited losses.

For some unknown reason, the r/wallstreetbets community decided to target GME shorts by purchasing a large volume of shares, sending the price soaring and forcing shorts to "cover" their bets. This creates a vicious cycle; as the stock price spikes, short sellers must rush to buy shares back to avoid potentially limitless losses, further driving up the price.

The Fallout of the Short Squeeze

As a result of this unprecedented short squeeze, reports indicate that some hedge funds with significant short positions are on the brink of bankruptcy, having lost hundreds of millions or even billions of dollars in mere hours. One hedge fund, rumored to be very affected, allegedly had to borrow $2 billion from a fellow hedge fund, only to lose that entire bailout the very next day.

This situation raises many questions about the future. Will GameStop CEO George Sherman, or any other insiders sitting on massive fortunes, be allowed to sell their shares right now? If I were in George Sherman's shoes, I would consider quitting immediately to free myself from conflicts of interest, allowing me to sell 100% of my shares on the open market as soon as possible. The outcome of this saga remains to be seen, and I'm eager to find out what happens next!