GameStop: when gamers decide to hide investment funds

Attacked by funds, the financially troubled American video game distributor received unexpected support from thousands of geeks and a few large investors. Its share price reached new heights.

AFP

In recent days, Gabriel Plotkin has been sleeping soundly. And that's an understatement. The boss of Melvin Capital Management, a famous New York investment fund, is living a real nightmare. Accustomed to good moves in the financial markets, the American has just lost several billion dollars on Wall Street to an army of budding traders who came out of nowhere. 

Gabriel Plotkin's "mistake", like other funds, was to bet down on the stock of GameStop, a fairly well-known video game distributor in the United States. Initially very successful, the bet of the American investor and other funds has just turned against them . And for good reason: neither he nor the other hedge funds had imagined that thousands of geeks, gathered in a discussion group on the social network Reddit, would decide to "take their skin off" in a stock market remake of David against Goliath. 

+ 700% in 2021

It all started in 2018. At the time, several geeks were getting excited on Reddit about the positions taken by several "vulture" funds on GameStop. In financial difficulty, GameStop is a prime target for a player like Melvin Capital Management and other "short selling" specialists. The principle is simple: a fund "borrows" shares of the target company from an intermediary, to sell them at market price, then later buys them back to its owner, betting on the fact that in the meantime the share price will have fallen. In the meantime, the share price will have fallen in the meantime. This is a good way to make a nice profit.  

For 18 months this strategy against GameStop worked very well. Melvin Capital Management and its friends made hundreds of millions of dollars. But things have changed in the last few days. Well mobilized, thousands of gamers, supported by professional investors such as Chamath Palihapitiya or even Elon Musk, have invested massively in the company to the point of exploding its share price.

Since January 1st, GameStop's share price has risen by more than 700% and the group, which is flying from record to record, is worth more than 10 billion dollars (only 1 billion in 2019)! As a result of the races, Melvin Capital Management and other Wall Street giants are almost on their knees in front of a company that has never been worth so much. On January 25, several funds even flew to the rescue of Gabriel Plotkin and Melvin Capital Management. The giant Citadel invested nearly $3 billion. Enough to stop the nightmare? Not so sure. 

Before the stock market, GameStop's share is up this Wednesday by more than 100%! "It is a scenario worthy of a Hollywood movie", explains Nicolas Chéron, head of the market strategy at ZoneBourse. Above all, other companies such as the former smartphone manufacturer Blackberry, the telecommunications giant Nokia or the AMC movie chain seem to be on the radar of the new white knights of the markets as well.

Source: AFP