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GameStop nearly died in 2019. Now hedge funds are scrambling to deal with the company's exploding stock. Here's what's going on.

GameStop nearly died in 2019. Now hedge funds are scrambling to deal with the company's exploding stock. Here's what's going on.

The largest video-game retailer, GameStop, has gone from barely hanging on to wildly valuable — and it's all because of a Reddit forum.

Inside a GameStop store in Manhattan, New York, on November 12.

In early 2019, GameStop's stock value fell off a cliff: It dropped from about $16 per share to under $4.

And it stayed in that range for just shy of two years.

Even in 2020, while the video-game business (including GameStop) had huge gains during coronavirus lockdowns, GameStop's stock price remained in the gutter. As recently as August — just under five months ago — the largest video-game retail chain had a stock value of less than $5 per share.

But in the second half of 2020, with big financial names like Michael Burry and Ryan Cohen buying up shares in the ailing retailer, things started looking up. The company's share value gradually increased until it outright surpassed its pre-collapse value in late 2020.

And that's when it got really weird: Between January 20 and January 26, GameStop's stock value leaped from just over $35 per share to north of $140 per share. By January 27, it hit new highs of over $325 per share — an over 8,000% increase from just a few months ago.



But why?

The answer has little to do with GameStop, nothing to do with video games, and a lot to do with a Reddit forum dedicated to playing the stock market.

The forum, named Wall Street Bets, has over 2 million members, and it's the collective action of those members that appears to be driving up the value of GameStop's stock. Simply put: As more people buy the stock, its price increases. And there's no signs of that collective action stopping anytime soon.

"GME has bounced and is once again at $225," one thread in the Reddit forum said on Wednesday morning. "Hold strong boys ... we will take GME to $1,000."

Another thread urged users not to sell and to remove their $1,000 price limit, which would automatically trigger sales.

"GME will stay going until WE sell. Do not f---ing sell boys, $1,000 was the original target but nothing is stopping this from getting to $5,000 but us," it said. "It sounds like a meme but it isn't. Hold on tight and make father Musk proud!"

More than anything else, the prevailing theme in Wall Street Bets is collective power — enough collective power to push back on the hedge funds and analysts that predicted GameStop's stock would never reach such heights.

"FOR ALL THE BIG F---ING HEDGE FUNDS MONITORING US, THIS IS A MESSAGE FROM US TO YOU, WE F---ING OWN YOU NOW, F---. YOU. GO BUY THE F---ING NEWS. LIKE AND COMMENT SO THEY SEE THIS POST. F--- YOU MELVIN CAPITAL. F--- YOU CITRON RESEARCH. YOU HAVEN'T CLOSED S---. THIS IS GONNA GO DOWN IN HISTORY," one such post said.

But that doesn't mean the value will hold in the long run or that GameStop is worth its stock value to its shareholders.

The explosion in GameStop's stock value is "just a cult phenomenon," Michael Pachter, Wedbush Securities' managing director, told Insider. "They don't currently have the earnings power to support a price this high," he added.

That's because, like Blockbuster and Tower Records before it, GameStop faces major challenges to its business model from the internet. As more people buy video games through digital storefronts, fewer buy games on physical discs. And GameStop is in the business of selling physical discs.

Despite a shake-up to the company's C-suite and the addition of Cohen to the company's board, GameStop hasn't revealed a long-term plan to stave off oblivion.

"The market appears to believe Ryan Cohen has a strategy that will take earnings up by a lot," Pachter said. "I can't give him credit for his genius until I see what the strategy is."

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