Video game retailer GameStop made national news when its stock soared this past week. Most of this rise was due to factors unrelated to the video game industry. However, it is a sign of a larger trend that will definitely impact video game industry analysis.
At the start of 2021, GameStop was under $20 a share. This represented a nice upward trend, as the stock had been in the $5 range the previous year.
GameStop has had a very low value because its brick-and-mortar retail model is seen as doomed. This makes the stock subject to large swings, especially on positive news.
As DFC reported, the holiday 2020 season saw GameStop sold out of many products, not just the new console systems, but games for the older systems. Clearly there is some life left in the retail model.
The stock rise for GameStop started around January 13 and given the general market conditions and the past holiday sales it was not that surprising. However, around January 22 GameStop stock started to soar. By January 27 it was close to $350 and had increased around 18x times since the start of the month.
By January 28, GameStop stock was starting to head back down, but the sudden rise has the entire investment community talking. Very little of this talk has anything to do with GameStop’s actual business.
There is all kinds of analysis about what is going on with GameStop stock. Basically, it boils down to the many short investors that have been betting on GameStop to fail. Recently these negative investors have been hurt by some positive news from GameStop such as Ryan Cohen making an investment and a partnership with Microsoft. However, most of the traders in the recent runup probably had little to no knowledge of this news.
GameStop’s soaring stock was all about the masses not only having easy access to unite across communities like Reddit, but the ease of stock trading with platforms like Robinhood. The masses decided to unite around GameStop in an effort to basically get back at all the seasoned Wall Street investors that were shorting the stock.
This faceless Internet community is not likely to go away and indeed seems spurred by the success of GameStop to go after out of favor segments such as AMC movie theaters.
The GameStop situation can be seen as either anarchy or a pure expression of capitalism and democracy against the entrenched order. Either way, it is not likely to go away and will have profound impact for investing.
Right now, the GameStop surge is not related to the video game industry. It is more about physical locations in the age of COVID and digital shopping (home retailer Bed Bath & Beyond is another stock being targeted). However, video game stocks in general will be highly susceptible to this trend.
The issue with video games is that they are a product that drives passion in consumers. GameStop was a particularly good target because many of the online traders had a direct interest in the company. For these investors, buying GameStop was like supporting an old friend that had fallen on hard times.
Video game stocks have always been subject to the passion of the community. Stocks often trade on the potential of the newest release, more than the long-term intrinsic value of the stock.
Online communities have been a very vocal driver of general opinion around video games. This includes general outrage around subjects like poor working conditions or money grabbing loot boxes in a video game.
The ease of today’s online trading makes it easy for communities to band together and put their opinion in action by buying stock. The video game demographic and the demographic of these traders has a high overlap.
There is going to be a lot of interest in this type of trading. While many people are calling the GameStop traders “dumb money,” a lot of money was made in a short time. It is also a fun way to invest, almost a sport or type of gambling with a great return. Day trading is getting a new life with the ability of online communities to drive stock prices.
Long term it is hard to say how this will shake out. The established Wall Street community is likely to see its influence decline. Of course, a new power elite balance will likely rise to take its place.
The video game industry is on the front lines of this war. Given the passion of the investor community for games, specific stocks could easily be targeted. DFC has been vocal about the continued need for solid public relations and marketing campaigns that speak honestly to savvy consumers.
GameStop was a story about positive investment in a company whose stock had been struggling. Unfortunately, the next video game company targeted may find itself on the opposite end, with its stock facing the wrath of the masses. It will be a turbulent time!