GameStop’s stock has been on a wild rollercoaster ride, experiencing hundreds of percent gains followed by significant crashes.
This latest surge in GameStop’s price is reminiscent of its infamous rise during the Covid-19 pandemic when it became the poster child of meme stocks—shares that generate massive hype despite having little intrinsic value.
The Rise of GameStop and the Power of Roaring Kitty
During the pandemic, GameStop was in dire financial straits and heavily shorted by major Wall Street hedge funds. However, Keith Gill, known as “Roaring Kitty” on YouTube and “DeepFuckingValue” on Reddit, saw potential in GameStop. He encouraged small investors to buy shares, predicting that hedge funds would have to cover their short positions by buying back GameStop stock, leading to a short squeeze and skyrocketing prices.
The Mechanics of a Short Squeeze
To understand the phenomenon, it’s essential to grasp what a short squeeze is. Short selling involves borrowing shares of a stock and selling them with the expectation that the price will drop, allowing the short seller to buy them back at a lower price for a profit. However, if the stock price instead rises, short sellers must buy back the shares at higher prices to cover their positions, driving the price up even further. This creates a feedback loop of rising prices as more short sellers rush to cover their positions, resulting in a short squeeze.
Melvin Capital’s Downfall
Roaring Kitty’s insight gained massive traction on the subreddit r/WallStreetBets, leading a wave of retail investors to buy GameStop shares. The resulting short squeeze saw GameStop’s stock price soar from under $1 to over $100. One of the hedge funds heavily invested in shorting GameStop, Melvin Capital, incurred billions in losses and eventually collapsed. Meanwhile, Keith Gill profited millions. This saga inspired the film “Dumb Money,” now available on Netflix.
Roaring Kitty’s Mysterious Return
GameStop’s stock had plummeted to around $10 by mid-April 2024 but began rebounding. On May 10, it reached about $18, an 80% increase in a few weeks. The real drama unfolded on May 13, 2024, when Roaring Kitty resurfaced with a cryptic tweet and several short video clips, sparking a frenzy among his followers. By May 15, GameStop’s price hit a high of around $65, a staggering 250% increase from the previous Friday. However, as traders took profits, the stock price settled back to around $22 by the week’s end, marking a 65% decline from its peak.
Ripple Effects on Other Meme Stocks
GameStop’s resurgence ignited interest in other meme stocks like AMC, SunPower, and Koss, which also saw sharp price movements. However, these gains were short-lived as prices quickly corrected. The trend extended to meme coins in the cryptocurrency market, which also experienced notable upticks.
Wall Street’s New Strategy
But this time, Wall Street has learned to adapt to the unpredictable nature of meme stocks. Major funds now monitor social media platforms like Reddit and Twitter to capitalize on these temporary hypes. Broker data revealed that during the recent GameStop surge, retail investors were primarily selling, many offloading shares they had bought at higher prices during the 2021 hype.
The High-Risk Game of Meme Stocks
Despite their lack of fundamental value, meme stocks continue to attract speculators. The key to profiting in these volatile markets is timing—getting in early and exiting before the bubble bursts. However, mistimed trades can result in significant losses, highlighting the high-risk nature of investing in meme stocks.
In conclusion, GameStop’s dramatic comeback underscores the ongoing influence of social media-driven trading and the potential for significant price swings in meme stocks. As always, investors should proceed with caution and be aware of the risks involved.
