What Happened:
Shares of video game retailer GameStop (NYSE:GME) jumped 104% in the pre-market session after 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.
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What is the market telling us:
GameStop's shares are very volatile and over the last year have had 45 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 17 days ago, when the stock dropped 23.8% on the news that the company announced preliminary financial results which revealed a sharp decline in sales. The results indicated Q1'24 net sales was expected to come in between $872 million to $892 million (vs. $1.237 billion in the same period last year). The sales guidance also fell significantly below analysts' expectations for Q1'24 sales of $1 billion.
Separately, the company announced an agreement with Jefferies to offer and sell up to 45M shares of its common stock. It expects to use the proceeds "for general corporate purposes, which may include acquisitions and investments in accordance with our investment policy." Notably, before the announcement, Gamestop had more than 305m shares outstanding, which means the stock sale could raise the supply by nearly 15%. This could have a negative impact on its stock price as the increase in the supply of outstanding shares dilutes the ownership of existing shareholders.
GameStop is up 74.3% since the beginning of the year, but at $28.86 per share it is still trading 40.8% 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 $15,557.
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