GameStop Corp. (NYSE: GME) stock has been a favorite among the crowd on the Wall Street Bets Reddit, with short squeeze after short squeeze resulting in overnight millionaires. After a strong run for the top in the market yesterday, the stock is ticking up again today.
Those gains seem to be picking up steam as the result of a completed at-the-market stock offering the company announced yesterday. Here’s what’s going on:
GameStop Completes Stock Offering
In an after-hours announcement yesterday, GameStop announced that it completed an at-the-market offering investors have been waiting on for some time. Through the offering, the company sold 3.5 million additional shares, driving gross proceeds of about $551 million.
The company said that it intends on using the funds to continue the transformation of its business and for general working capital.
Why Redditors Love GME Stock
Since the beginning of the year, GameStop stock has been a battleground, where the war is waged between the hedge funds that make money by shorting stocks and the retail investors that are getting tired of big-money investors taking advantage of them.
In fact, GameStop was the first stock the Reddit crowd sent screaming for the top earlier this year, leading to the loss of billions of dollars on the hedge fund side of the coin.
Nonetheless, it seems as though hedge funds haven’t yet learned their lesson and retail investors don’t intend on backing down in their effort to teach it.
In fact, according to FinViz, nearly 20% of the float is still sold short.
For those of you who aren’t aware of what a short squeeze is, short sellers borrow shares from investors who are long (without the knowledge of those investors), then sell those shares on the open market, hoping for declines. The goal is for the stock to fall, giving the short seller the ability to pick the shares back up at a lower price to return them to their rightful owner, making money in the process.
However, regardless of which direction the stock price goes, the short seller must return the shares. So, when prices tick upward, short sellers experience losses, and if the price goes too high, those short sellers race to buy shares and cover their positions, leading to tremendous increases in volume as well as significant price appreciation.
That’s exactly what we’ve been seeing out of GameStop stock, and if the crowd on Reddit has anything to do with it, the movement is far from over.
Why Hedge Funds Haven’t Learned
The hedge funds argue that GME shares aren’t worth anything near what the retail investors have pushed the value of the stock to. However, one thing that’s for sure in the market is that what a stock worth has more to do with how much money investors are willing to pay for it these days than it does with fundamental data.
Ultimately, Redditors aren’t buying GameStop because they see a strong long-term opportunity in holding the shares. No, Redditors are buying GME shares because they see tremendous potential for short-term gains.
The fact of the matter is that as long as there’s a heavy short interest in the stock, there will be significant opportunities to capitalize on short squeeze-related moves.
Hedge funds and other institutions that are shorting the shares don’t seem to understand that notion. These funds are relying on fundamental analysis as a way to decide if the stock is under or overvalued, but they’re ignoring the most significant force in the movement of prices in the stock market today, the investor.
The Bottom Line
Plenty of experts are counting GME stock out. They say that there’s no way for the stock to maintain its current valuation for the long run, and they may be right. However, in the short run, as long as the stock trades with high levels of short interest, it will continue to be a battleground, and by my count, retail investors have won more battles and continue to win the war. All told, there’s plenty more room for gains in the ticker.