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Thursday, February 25, 2021

Letters to the Editor from an economics major on the Gamestop frenzy

Power to the players, power to the people

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For the past week, my friends have been asking me one question, over and over:

“What is going on with GameStop?”

The first part of our story begins with the company itself. GameStop Corporation, as many of you know, is a gaming merchandise retailer founded in 1984 with over 5,000 stores nationwide. Since the rise of Amazon and e-commerce, GameStop, like many other brick-and-mortar stores, has suffered immensely, with revenue falling by almost 22% from 2019 to 2020. They have tried to transition to online sales but attempts so far have been unsuccessful. GameStop’s long-term outlook by analysts had been grim. Enter the hero of our story: Mr. Ryan Cohen.

Ryan Cohen started out as a small businessman with an idea: pet e-commerce. He founded MrChewy Incorporated (now just Chewy, Inc.), an online retailer for pet food and pet-related products. Many of us are familiar with Chewy because of its Florida-based operations – for those of you from South Florida, you may have seen its distribution center along I-75, about half an hour south of Gainesville. Chewy was bought out by PetSmart in 2017, to the tune of $3.35 billion (one of the largest ever acquisitions of an e-commerce company), making Cohen very wealthy and somewhat of an expert on e-commerce. Cohen stepped down as CEO of Chewy in 2018. 

In September of 2020, Cohen made his next move: purchasing a 9% stake in GameStop, hoping to turn the struggling company around by making GameStop the ultimate gaming company: sponsoring eSports tournaments, starting a streaming service, converting their stores into PC part warehouses, and many other ambitious ideas.

Wall Street’s animosity towards GameStop manifested itself in the form of short-selling, or ‘shorting.’ Shorting a company is a way to profit on its stock price going down. How do you short sell? 

Take a hypothetical company, Bulldog Incorporated, with a stock price of $10 per share. I think, rightly so, that in the coming years, the price of the stock will go down. I borrow from you one hundred shares of Bulldog Inc., and you charge me $5 every week as interest on the loan of shares. So far I have spent $5 and have $1000 worth of Bulldog Inc. I then sell those shares on the open market. In two weeks, Bulldog Inc.’s stock price plummets to $5 a share. I then buy back one hundred shares and return them to you. $1000 - $500 (the cost to buy back the stock) - $10 (two weeks of interest) = $490, a tidy profit for me. 

What happens when I short a good company? Let’s say I invest in Gator Corp, a similar company to Bulldog Inc. but better in every way. Their stock price is also $10 initially. I borrow one hundred shares, agree to pay $5 in interest per week, and then sell them on the open market for $1000. But Gator Corp has a great year and their share price rockets up to $20 per share. In order to buy back the shares I borrowed, I would have to pay $2000 dollars. I could wait and hope the price falls back down, but I get charged $5/week as long as I wait. I decide to cut my losses after 2 weeks: $1000 - $2000 - $10 = -$1100. I lost 110% of my money.

This process of short-selling is fairly risky, because although it may seem like a nice way to profit off a company losing money, the downside is that your risk is infinite. You must buy your shares off the open market, and when you are both contractually obligated to return the shares you borrowed and still paying interest, you are desperate to buy shares at any price. This can ‘squeeze’ the price in a very short period of time if it fails. 

Wall Street, specifically a company named Melvin Capital, has shorted GameStop extensively. There are approximately 69 million shares of GameStop, and they, along with many other financial institutions have borrowed and shorted 90 million of these shares. Yes, you read that right. They have shorted more shares than there are in circulation; 140% of GameStop stock is short. 

While all this had been going on, a new force entered the arena: the internet. Forum sites (notably Reddit) had been quietly talking about the possibility of GameStop actually turning into a profitable company, and loudly talking about the opportunity of a short squeeze. And in mid-January, they got their chance. 

Ryan Cohen and two of his associates from Chewy were selected to be on the board of GameStop and Cohen’s vision for GameStop had a chance of manifesting. Investors loved this. So they bought stock in GameStop, and the stock price went up. And up. And up. And up. And now GameStop has become a household name, not for their amazing services, but for the outrageous stock price. At the time of me writing this, one single share costs $347.51, up eight thousand percent in the past year

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Not only have ‘retail investors’ gotten in on GameStop, but even non-investors have gotten in on the madness. News articles are reporting about GameStop’s outlandish price. Several other companies with a high percentage of short shares such as AMC (stock ticker $AMC) and Virgin Galactic ($SPCE) have seen their stock price rocket up as people attempt to replicate what has happened with GameStop.

And now, the SEC has released a statement, acknowledging the market volatility and confirming that they are looking into the matter. Many financial news companies such as CNBC have criticized retail investors for squeezing Melvin Capital and recklessly jacking up the price. Famous individuals like Elon Musk expressed support for the retailers and their taking of money from rich hedge funds for the common man, calling them modern-day ‘Robin Hoods’. Coincidentally, that’s the name of the platform many retail investors used to squeeze GameStop.

Personally, I own shares in GameStop. 160 shares, costing me on average $16.48 each when I bought them originally. And I am playing the world’s tiniest violin for these hedge funds. GameStop is a US company that employs fifty thousand people. And you want them to go out of business? Un-American. While there is definitely risk with people coming into GameStop now, they think that retail investors are dumb. News flash, Jordan Belfort, I'm not the one who shorted more shares of a company than there are in existence. If these predatory Wall Street firms go bankrupt over their terrible financial decisions and predatory business practices… good riddance. 

James Stapleton is third-year UF student majoring in Economics.


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