Short Squeeze Aside, is GameStop Okay?

It’s game on for GameStop. The stock, though lower on Friday, has surged more than 100% this week.

So business is not booming for Gamestop. This past week, the gaming company said that its holiday sales were down 3.1%, and the company continues to withhold earnings guidance, due to the “evolving impact of Covid-19.” GameStop [$GME] shares jumped 101% on the week.

The catalyst for the rally seemed to be news Monday that Chewy co-founder Ryan Cohen would be teaming up with GameStop’s board of directors, along with two former Chewy executives. Cohen has advocated that the company should close more stores and make big changes around e-commerce. Cohen’s RC Ventures retains a 13% stake in GameStop. With three board seats, the firm can influence business decisions.

A lion’s share of last week’s gains came on Wednesday—two days after the board announcement—when GameStop had its largest one-day gain to date. The gaming retailer was positioned for a short squeeze, in which short sellers faced with high borrowing costs and accumulating losses are forced to buy shares to cover their asses.

The GameStop board additions were Alan Attal, Ryan Cohen and Jim Grube, who were reportedly brought on for their expertise in “e-commerce, online marketing, finance and strategic planning”.

In the meantime, retail buyers are boasting their gains in the “WallStreetBets” on Reddit. Short sellers, on the other hand, were down $812 million in mark-to-market losses on Wednesday alone. Wedbush analyst Michael Pachter said the run-up was, “purely a short squeeze, accompanied by Robinhood-type retail enthusiasm for a transformation to e-commerce.” Bumble IPO: Which Way We Swiping?

High volatility and a short supply of float meant bears were “squeezed by rabid retail investors,” he said. Asked if he thinks the gains will hold up, Pachter answered, “I do not.” He has a Hold rating on GameStop, with a $16 price target.

The year-over-year sales drought in GameStop’s holiday period between November and December came in the teeth of new gaming consoles unveiling from Sony [$SNE] and Microsoft [$MSFT]. The company cited store closures and the pandy for the sales decline. FWIW, Comparable-store sales were up 4.8%.


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