Why GameStop (GME) Stock Is Trading Lower Today

Radek Strnad /
2024/06/07 11:32 am EDT

What Happened:

Shares of video game retailer GameStop (NYSE:GME) fell 20.5% in the morning session after the company reported first quarter earnings results. Its revenue and EPS missed analysts' expectations, and it didn't share an outlook for the rest of the year. In addition, the company continued to burn cash. The quarter was not without its share of surprises. GameStop was initially slated to report earnings on June 11 but pre-announced the results, likely in an attempt to capitalize on the hype generated by Reddit star Roaring Kitty, who maintained long bets heading into the earnings, including call options on the company rumored to expire on June 21, 2024. From a fundamental perspective, this was a bad quarter for GameStop.

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What is the market telling us:

GameStop's shares are very volatile and over the last year have had 48 moves greater than 5%. But moves this big are very rare even for GameStop and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The previous big move we wrote about was 4 days ago, when the stock gained 104% on the news that retail trader Keith Gill (also known as Roaring Kitty) disclosed a stake in the company valued at around $115.7m. According to the screenshot posted on Reddit, Keith Gill bought 5 million GameStop shares at $21.27 and 120,000 call options worth $65.7 million with an exercise price of $20, set to expire on June 21, 2024. The update suggests a return of meme stock trading (includes taking long positions in heavily shorted stocks), fueled mostly by retail investors. 

As a reminder, Keith Gill played a significant role in the last meme stock trading frenzy in January 2021. By taking long positions in stocks that have been heavily shorted, market participants can trigger a short squeeze, causing a stock price to go up. This happens as short positions are closed to limit losses, as the collective buying pressure of market participants causes the stock price to move against those with a short position.

GameStop is up 124% since the beginning of the year, but at $37.11 per share it is still trading 23.9% below its 52-week high of $48.75 from May 2024. Investors who bought $1,000 worth of GameStop's shares 5 years ago would now be looking at an investment worth $29,753.

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