GameStop (NYSE: GME) shares are once again back in the limelight, with the return of Keith Gill — aka ‘Roaring Kitty’ among other well-known aliases — to social media. The stock is now bounding up and down on nothing other than memes being tweeted from Gill’s X account.
And there may be more volatility to come.
GameStop shares: what happened in 2021?
Concisely, Gill recognised that several famous hedge funds including Melvin Capital had taken a short position on GameStop. In essence, the hedge funds had paid a fee to ‘borrow’ shares in GameStop with a view to return these shares at a lower valuation and pocket the difference.
Gill saw this as unfair both to the legacy company and to retail holders. He was instrumental in an online reaction where investors caused a short squeeze — buying shares en masse and putting up the stock’s price. This had a compounding effect; some funds lost billions, and when exiting their positions they had to buy back the stock at a premium, further pushing up the price.
The story was even made into Hollywood film ‘Dumb Money.’
The squeeze was made possible by multiple factors; the monetary stimulus caused by the pandemic saw investors with excess capital and free time. Large followings on channels like Reddit’s Wall Street Bets meant that many small retail traders could work as one unified force. And arguably, the growth of dozens of new trading platforms helped too.
What’s happening now?
On 13 May, Gill tweeted out an image (meme) of a gamer sitting forward in his chair, the analyst’s first tweet for three years. Shares in GameStop surged by 74% — with the original tweet now enjoying 26 million impressions and 133,000 likes.
Since then, Gill has tweeted out dozens of video clips of popular media, leaving investors to attempt to interpret his viewpoints, with the stock surging rapidly in both directions.
Perhaps the key difference between 2021 and 2024 is that three years ago Gill put forward a series of YouTube and Reddit posts covering the solid investment rationale for a short squeeze, and this time (at least so far) is sticking just to memes.
Of course, this is subject to change.
Understanding the controversy
There are two viewpoints to consider.
On one side, in a free market governed by free speech rules, and limited only in specific cases, Gill should be able to give his opinion in any format he chooses, and also buy any stock which takes his fancy. In a Congressional hearing back in 2021, he maintained that his social media posts were only for ‘educational purposes,’ do not constitute financial advice and are not designed to illegally ‘pump’ up the stock.
Gill can be viewed as a retail champion, who squeezed hedge funds planning to profit from the potential collapse of an American company. Arguably, GameStop would have ceased trading without the meme stock mania.
On the other hand, his influence over GameStop could be considered market manipulation given the complete disconnect between the fundamentals of the company and its share price movement during each spike.
For context, Q4 2023 net sales fell to a little under $1.8 billion, down from more than $2.2 billion in Q4 2022. And while many investors made a fortune from the volatility, others suffered significant losses — many of whom were new market participants.
For long-term GameStop investors, there is perhaps an emotional connection to the stock. As the company went stratospheric back in 2021, multiple platforms turned off the ‘buy’ button on the shares but retained the ‘sell’ button. Regardless of legitimate reasons, this caused losses to many traders — and led to accusations that the hedge funds had been deliberately let off the hook.
Clearly, GameStop’s legion has not forgotten. The company reported 75.3 million directly registered shares (DRS) as of 20 March 2024 — where investors have deliberately registered their shareholding to prevent them from being lent out. This also has the effect of reducing the pool of available shares to buy, which could help amplify the effect of any buying going forward.
Where next for GameStop shares?
It’s possible that Gill was subject to a gag order after the 2021 craze, and that he may be free to post a position update soon. If he has not sold any shares, or even added to his position, the stock could rocket higher.
However, the recent explosion could just as easily fizzle out. The unique set of circ*mstances present in 2021 were enough to set off a technical short squeeze and 2024 is a much different scenario.
Investing or trading in meme stocks like GameStop shares can be fun, and profitable. And there is certainly an element of ‘sticking it to the man,’ at least for some investors. But despite any social media bravado, the stock is also extremely volatile, and arguably very high risk.
How to buy, sell and short GameStop shares
