GameStop, an American brick-and-mortar retailer specializing in video games, consumer electronics, and gaming merchandise, experienced a significant event in early 2021 that attracted widespread attention. The company had been struggling for years due to competition from digital distribution services and the economic effects of the COVID-19 pandemic, which reduced in-person shopping. As a result, many institutional investors began short selling GameStops stock, believing that its business model was outdated and its stock price would decline.
The situation changed when a group of internet traders, particularly the WallStreetBets community on Reddit, became bullish on GameStop's fortunes, pushing its share price higher during the final quarter of 2020. These traders believed that the company was undervalued and that large investors had unfairly bet billions of dollars on its stock falling. As small investors championed their purchases of GameStop's stock in viral posts online, the stock rapidly rose in price, forcing the large investors to cover their losses by buying back the borrowed stock.
This phenomenon, known as a short squeeze, resulted in a dramatic increase in GameStop's stock price. By the end of 2020, the company's stock was trading at almost $20. In January 2021, the price surged to nearly $40 per share, then to $76, and eventually reached a peak of over $400. The episode had significant implications, with some hedge funds, such as Melvin Capital, experiencing substantial losses and even facing potential failure.
However, the stock's price eventually declined, and GameStop's long-term prospects remained uncertain. The company's fundamental challenges, such as the shift to online sales and the decline of brick-and-mortar retail, still persisted. The GameStop episode raised questions about the role of retail investors, the influence of social media on stock markets, and the potential need for regulatory scrutiny.
