Update #4 (01/27/21, 4:50 PM EST) — GameStop stock has closed at $347.51 on the third day of trading this week as just one of many interesting developments today.
We’ve continued our coverage with more recent events on the GameStop story in a new article.
Update #3 (01/27/21, 10:10 AM EST) – GameStop stock has now hit an unprecedented high of $330 — more than double its record high of $150 set just two days ago.
An additional day of fervent trading was partially fueled by Tesla and SpaceX’s Elon Musk tweeting out a link to the /r/WallStreetBets subreddit.
Additionally, hedge fund Melvin Capital reportedly sustained heavy losses as a result of GameStop’s explosive (though likely short-lived growth) in the last few days, leading the company to seek help in fixing its short-term financial woes.
An explanation for the battle over GameStop’s value was posted to /r/wallstreetbets. In it, /u/thicc_dads_club explains a basic formula of the "times revenue" valuation which is as follows:
Revenue × Growth ÷ Float = Stock Price
The "Growth" Value in this formula is typically 0.5–2.0 depending on the performance of the company. "Float" is the number of shares available to trade. Using this formula, an appropriate value for GameStop would be between $64–$255 per share, leading to allegations that the stock was deliberately undervalued by some traders — a further explanation of the battle between Reddit’s day-trading community and billion-doillar hedge funds. Whether this valuation is accurate is another matter, which given we’re not financial analysts, we’ll steer clear of.
Right now, it is best to understand that GameStop’s stocks are highly volatile going between record highs and the $60 range at high speed.
Update #2 (01/25/21, 4:05 PM EST) – Today’s trading of GameStop stock has ended as the markets have closed, finally settling on a price of $76.76.
Trading was especially chaotic today; Yahoo! Finance’s data shows that it hit a record high of $158.97 at 10:46 AM EST. Less than two hours later, it cratered to $61.13 at 12:24 PM. That latter price might seem low, but that’s still 3–4 times it price over the last two months (craziness of the past week excepted).
Things picked back up in the closing minutes of trading, eventually bringing the price back up to $76.76 at market close per Yahoo! Finance’s data. That’s slightly less than half of its all-time peak today and lower than its opening price, but it’s still well above its price at the end of trading on Friday.
Update (01/25/21, 11:30 AM EST) – The chaos of GameStop stock trading has continued, taking the company’s value on the market to record highs.
The company’s stock opened at around $96.00 this morning, roughly a 50% spike since the conclusion of trading on Friday evening as shown on Yahoo! Finance’s chart tracking the stock.. It has since spiked twice, reaching a record high approaching $150 — the highest value that GameStop stock has held to date. The price has been bouncing up and down in morning trading and it’s currently holding at around $108.
Our original story continues below.
GameStop stock trading has been halted twice due to volatility, most recently due to a 69% spike in its value as stock analysts (including Reddit’s /r/wallstreetbets) battle over the company’s perceived value.
As you probably know, GameStop is a video game retailer that’s been around for a fair few years. The company made an announcement late last year that it was going to be partnering with Microsoft and getting a cut of digital sales made on certain Xbox products sold through its retail locations. This likely allayed the concerns surrounding the company caused by overall declining physical sales — nevermind the effects of the ongoing pandemic — but it appears that stock traders can’t quite decide on what the company should be valued at.
Why is GameStop Stock Surging?
Trading of GameStop stock was halted for volatility after a 69% spike according to a tweet Odd Lots podcast co-host Joe Weisenthal (via The Verge’s Tom Warren on Twitter). Reports of the halt were subsequently confirmed by Bloomberg.
The company’s stock has increased 1,500% over the last nine months according to an excellent report from Ars Technica. It all began when investor Ryan Cohen — a man who made $3.35 billion by selling his pet food superstore Chewy to PetSmart in 2017 — bought a stake in the company of around 10%. Cohen is generally known to only invest in safe stocks; this, in part, was a signal to other investors that GameStop might have more value than the market had anticipated.
This led to a sort of battle between more traditional stock traders and a somewhat different kind of investor that is best found on Reddit’s /r/wallstreetbets subreddit. A company named Citron Research believes that GameStop is overvalued. WallStreetBets doesn’t quite agree with this and has been moving in another direction, partially for the meme potential. And then they made a song about it. There’s a lot of nuances here, but this explanation by Louis Rossman gives a good breakdown of this very strange battle.
Simply put, traders and analysts can’t quite decide what the value of GameStop stock should be, with some betting heavily that it will decrease, and others that it will increase. That’s causing the price to spike tremendously — sometimes at a worryingly fast pace that causes trading to be halted.
Why Was Trading of the Stock Halted?
GameStop stock trading was halted largely because of its rapid increase in value. This likely tripped something called an "exchange circuit breaker" as explained by Investopedia:
Circuit breakers can also be imposed on single stocks as opposed to the whole market. Under current rules, a trading halt on an individual security is placed into effect if there is a 10% change in value of a security that is a member of the S&P 500 Index, Russell 1000 Index or QQQ ETF within a 5-minute time frame, 30% change in value of a security whose price is equal or greater than $1 per share, and 50% change in value of a security whose price is less than $1 per share.
As one might expect, these circuit breakers can be activated when the value of a stock suddenly goes down in an attempt to ease panic selling. Stock exchanges, however, also have provisions if a stock suddenly goes up, and that’s what’s recently happened with GameStop.
What does this mean for GameStop? As a general rule, the market tends to settle on a valuation after some time, so we’ll likely see trading stabilize sometime soon. This is an unusual situation, however — as with all things with the stock market, no one can truly say what will happen with a 100% guarantee.
Do you think GameStop will continue to have strong business in the coming years or is it facing an inevitable decline? How do you think this retailer could adapt to the surge in digital gaming beyond its partnership with Microsoft? Let us know in the comments below!