GameStop (NYSE:GME) mania has come and gone, but for the video game retailer’s biggest fans the love affair isn’t over.
GameStop shares famously skyrocketed in January, driven when a band of mostly millennial traders on the Reddit message board WallStreetBets executed a short squeeze and a gamma squeeze, lifting the price from less than $20 at the beginning of the year to as high as $483 at its peak on Jan. 28.
That bubble burst, however, and the stock fell back down to near $40 per share. But then it surprisingly rallied again through February and March, pushed by the same group of traders, on hopes that Chewy co-founder Ryan Cohen — who will become chairman of Gamestop after the company’s annual shareholder meeting in June — can execute a successful transition to e-commerce.
The person most identified with the GameStop rally is 34-year-old Keith Gill, who goes by RoaringKitty on Twitter and DeepF*ckingValue on Reddit. Gill’s posts advertising his massive holdings in the stock and his bull thesis helped rally other traders, who were inspired by Gill’s refusal to sell even as he sat on millions on gains. His purchases of GameStop after the initial rally helped push the stock higher in February and March, and he is now sitting on 200,000 shares of GameStop stock — worth about $30 million.
Gill has become the avatar of the GameStop traders, and like many of those most enthusiastic about the stock, he’s a millennial. Though the short squeeze formed a cornerstone of the initial GameStop bull thesis, there were other reasons why the video game retailer attracted the millennial generation.
It’s a familiar, nostalgic brand
Millennials were the first generation to grow up with modern video games. The industry wouldn’t be worth what it is without them.
GameStop’s growth essentially tracks that of the millennial generation. The company was founded in 1996, went public in 2002, and peaked through much of the 2010s, with annual revenue hitting roughly $10 billion before the company started to decline over the last couple of years.
If you’re a millennial gamer, GameStop was where you bought games and consoles and traded in used games. Much like Blockbuster represents the video rental business from a certain era, GameStop does the same with video games.
Familiarity is a useful tool in investing. Millennials who frequent GameStop readily understand how the business works. While they may not know the financials or the other particulars of the stock, they have a level of knowledge regarding the company and the broader video game industry that many older investors do not. That’s a great starting point for learning more about the stock, and that familiarity with GameStop helped make it popular among Reddit traders, which made the short squeeze so successful. A similar phenomenon also took place with movie theater operator AMC Entertainment.
The battle with short sellers was personal
Millennials came of age during the worst economy in 80 years. Many of them graduated into an economy unraveling from the great financial crisis, while others saw their parents lose their jobs or their homes go underwater as the housing bubble burst.
For many in that generation, there was one culprit: bankers. Indeed, much of the blame for the great recession can be laid at the feet of Wall Street, though those institutions generally escaped any meaningful censure for their role in the crisis.
Many millennials took it personally, and the GameStop short squeeze seemed to offer a vehicle for exacting revenge against the very hedge funds that had wrecked the economy just as these younger investors’ careers were starting. That a video game retailer popular with millennials was the target of so many short sellers only made the narrative more perfect. The band of Reddit traders could save a beloved chain while taking down greedy Wall Street profiteers at the same time, according to the narrative they told.
While the epic short squeeze of January has come and gone, nearly 40% of GameStop shares are still held short as of the end of March, meaning the battle between the two camps is far from over.
Is it a buy?
Even as it’s faded from the headlines, GameStop shares are still up more than 700% year-to-date, and the stock now seems to be stabilizing at around $160/share. At this price, GameStop is worth $11 billion.
But it’s hard to justify that valuation based on fundamentals. After all, GameStop was heavily shorted because it’s a declining business. Video games are moving to digital formats, meaning the cartridges that have been the center of GameStop’s business are becoming relics. Even if the company can pivot to e-commerce, selling online doesn’t change that reality, and game-makers like Microsoft and Sony have little need to deal with GameStop when they can just go direct-to-consumer.
The company still has more than 5,000 retail stores, meaning its prospects are tied to brick-and-mortar real estate even if the e-commerce strategy works. Its online sales nearly tripled in the key fourth quarter, driving comparable sales up 6.5%, and made up 34% of revenue for the quarter — but for fiscal 2020, the company reported a generally accepted accounting principles (GAAP) loss of $215.3 million, showing the business is far from healthy.
At the current price, GameStop’s valuation still looks inflated by the base of Reddit traders pulling for a turnaround. While anything could happen and the stock is likely to be volatile again, based on its fundamentals investors are better off avoiding the retail stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.