GameStop stock continues to soar amid interest from retail investors one analyst called “rabid.” Now the stock has the attention of a notable activist short seller.
Citron Research’s Andrew Left wrote in a Tuesday post on Twitter that he plans to host a livestream discussing five reasons those buying GameStop (ticker: GME) stock at recent levels “are the suckers at this poker game.”
“Stock back to $20 fast,” he wrote. “We understand short interest better than you and will explain.”
Left did not immediately respond to an inquiry from Barron’s asking him to expand on his thoughts, as well clarify whether he’s taken a short position himself. But around the time of Left’s post, GameStop stock pared back from a $45.52 intraday high. The stock closed up 11% to $39.36.
On Tuesday, 74.6 million GameStop shares were traded, the stock’s fifth-highest volume on record, according to Dow Jones Market Data. Last Wednesday set a record volume for the stock, when 144.5 million shares were traded.
GameStop shares doubled last week following news that three former Chewy executives, including co-founder Ryan Cohen, were joining the company’s board. Cohen’s RC Ventures has a 13% stake in GameStop, and has urged the company to close more stores and embrace e-commerce.
The day of the announcement, the company pulled out of a planned appearance by executives at last week’s ICR investment conference. A GameStop spokesman had pointed Barron’s to the conference for commentary on the company’s long-term plans. GameStop representatives haven’t returned repeated requests seeking comment in the week since.
After the pop last week, Wedbush analyst Michael Pachter pointed to the stock’s massive short interest, recently at 138% of shares available for trading, according to FactSet data compiled by Dow Jones Market Data. Short-selling analytics firm S3 Partners, which adjusts its short-interest calculations, estimated short interest of about 58% earlier this month.
Such bearish bets have left the stock primed for a short-squeeze, a short-term event where short sellers bid up shares, rushing to cover their positions. Pachter said such short sellers were “squeezed by rabid retail investors.” He didn’t think the pop would last, and has a $16 price target on the stock.
Left’s post signaled he’ll discuss the technical factors related to short selling at play during his stream, set for 11:30 a.m. on Wednesday. In recent weeks, Barron’s has outlined a long-term bearish case. The company is struggling amid broader shifts to free-to-play games and digital downloads, both of which cut out physical game sales.
Despite new consoles from Sony (SNE) and Microsoft (MSFT) that were forecast to drive stronger sales in the broader games industry, GameStop said last week its sales were down 3.1% from last year during the nine-week holiday period. The company pointed to store closures, limited console supply, and the impact of Covid-19. But comparable sales, which strip out the effect of store closures, were only up 4.8% from a rough 2019 holiday period.
Many of the most popular games, like League of Legends and Fortnite, are free to download and play. Instead, publishers offer in-game cosmetic items directly in their online store. For those games, GameStop is often limited to acting as a middleman, selling gift cards for in-game points.
And as more players opt to download games directly on their consoles, it’s the gatekeepers of such systems—Sony, Nintendo (NTDOY), and Microsoft—that stand to benefit. Meanwhile, PC game distribution is a crowded space. Valve’s popular Steam online store is facing some competition from platforms offered by Fortnite maker Epic Games, CD Projekt (CDR.Poland), and Electronic Arts (EA). It’s unclear how an old-school retailer like GameStop can make sustainable headway in this already competitive landscape.
Amazon.com (AMZN) and Google parent Alphabet (GOOGL) are also leveraging their cloud infrastructure to offer cloud gaming-streaming services akin to Netflix. Adoption hasn’t yet been disruptive to the broader industry. Microsoft, another major cloud player, and Sony have such services that are backed by their libraries of in-house content. GameStop has a profit-sharing deal with Microsoft for its Xbox Game Pass, but Credit Suisse analyst Seth Sigman noted at the time that he was skeptical that such a deal would offset the decline of physical game sales.
Add it all up, and it’s clear GameStop will need to execute a radical turnaround plan to stay relevant.
Write to Connor Smith at [email protected]
