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GameStop’s surprise profit sparks short squeeze, meme shares rally




March 22 (Reuters) – Meme shares GameStop Corp ( GME.N ) surged nearly 41% on Wednesday as the video game retailer’s first profitable quarter in two years pressured bearish investors and sparked a rally in other stocks popular with retailers.

GameStop, AMC Entertainment Holdings Inc ( AMC.N ) and several other names were at the heart of a meme stock frenzy in 2021[ads1], fueled by small investors coordinating on social media. A number of those names were up on Wednesday.

However, not everyone was convinced that the increase would start another round of extended gains.

“Crypto, meme stocks, IPOs, SPACs and other speculative assets peaked long ago, and the easy money frenzy of 2020-21 now looks like an aberration on price charts, not the start of a brave new world,” said AJ Bell Investment Director Russ Mould.

Grapevine, Texas-based GameStop surprised Wall Street analysts Tuesday night by reporting strong fourth-quarter profits, thanks to a 16% drop in costs.

Investors took this as an early sign of a turnaround for GameStop, whose core business of selling new and used video game discs is shrinking as consumers shift to downloading games digitally or streaming.

“Fortunately, this detour is not due to meme investors, but an actual concrete, fundamental event,” said David Wagner, portfolio manager at Aptus Capital Advisors, who does not have a position in the stock.

GameStop was the second most traded US stock among retailers, according to JP Morgan. The stock hit its highest level in more than four months with 54 million shares changing hands by 1:32 p.m. ET, among the five most traded U.S. stocks.

A GameStop Inc. store is seen in Encinitas, California, U.S., May 24, 2017. REUTERS/Mike Blake/File Photo

Still, Mold said the share rise “seems to be a result of good cost control rather than top-line growth, which is not ideal”.

Another favorite among retail investors – Carvana Co ( CVNA.N ) – rose 11% after the used car dealer said it expected a smaller core loss in the current quarter.

Among other heavily shorted meme stocks, AMC shares were up 2.7%, Koss Corp ( KOSS.O ) rose 6.8%, and the Roundhill MEME ETF ( MEME.P ) rose 0.5%.

SOURING SHORT BET

When there is a rush of demand from short sellers looking to exit bearish bets due to a rise in a stock price, it pushes prices even higher, resulting in a short squeeze.

Short sellers betting against GameStop have lost $610 million since the start of the week, research firm Ortex estimated, adding that about 24% of GameStop’s publicly available shares were shorted.

Wedbush raised its price target on GameStop’s stock to $6.50 from $5.30 after the results, as the brokerage said the lower cost structure reduces the risk of ongoing losses.

“We didn’t come for shorts, we were here for the brand name,” wrote a retail trader with the username ‘ApeBeyondTheMoon’ on investor-focused forum stocktwits.com.

Reporting by Medha Singh in Bengaluru; Editing by Maju Samuel, Saumyadeb Chakrabarty and Arun Koyyur

Our standards: Thomson Reuters Trust Principles.



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