Online memes propel GameStop stocks to incredible highs
Perhaps the weirdest moment of this ongoing story was when the YouTuber and trader Roaring Kitty aka DeepF***ingValue dipped a chicken tender into champagne to celebrate his success at turning $53,566 into roughly $20 million, at time of publication. But the strange celebration was just icing on the cake for the fact that he had done so trading shares in GameStop – a company that had posted a net loss of $275 million on revenues of $5.2 billion in the last 12 months but still seen its stock price soar by over 7000 per cent in the same period. The share price peaked at $380 having traded at under $3 at various times last year. Its stock is now the most traded asset on the planet. In the process this dizzying rally has forced a major hedge fund, Melvin Capital, to seek $2.75 billion in support from private investors after the booming prices left it down 30 per cent.
To understand what is undeniably one of the weirdest stories in modern trading you need to dive into the world of /r/wallstreetbets, a forum hosted on the social media sight Reddit frequented by retail traders where irreverent memes, obscenities, and stock tips fly freely.
GameStop stock has long been a target of short sellers: traders who bet on its stock value going down. As a company it specialises in selling video games from stores located in large malls as such it has been hit hard by the growing shift to people downloading games from online stores, and the pandemic driving ever more shoppers online seemed the final nail in its coffin. Some posters on /r/wallstreetbets, however, disagreed.
Back in May 2019 one anonymous user made the case that even assuming GameStop’s sales continued to decline steeply the company was undervalued based on its substantial cash reserved. At first few paid attention and GameStop’s stock price continued to decline but a more bullish outlook on GameStop slowly gained ground. Michael Bury – of The Big Short Fame and now guru to retail traders who frequent online forums – announcing he was going long on GameStop. Ryan Cohen, who made a fortune selling pet food online, also bought stock in GameStop and then joined its board with the aim of helping it shift sales online. Meanwhile, on /r/wallstreetbets Roaring Kitty – going by his Reddit name DeepF***ingValue – proselytised the bull case.
As the bull case gained ground it combined with old ideas that users of /r/wallstreetbets could coordinate action on GameStop stocks. The origin of this ideas was a half-joking suggestion by an that the /r/wallstreetbet users could coordinate to take over GameStop if it fell far enough. However, as bullish views began to outweight bearish ones, the evolved idea with one Reddit user, Senior_Hedgehog, suggesting retail traders could instead coordinate to engineer something else, a massive short squeeze.
A short squeeze works by exploiting the mechanics of short selling. In essence short sellers borrow stocks i.e. buy them with the promise to return them by a certain date. They then sell these stocks on to other traders and if the stock price then declines they profit by repurchasing the stock at a lower price before returning to the person they originally borrowed it from.
If, however, the stock price suddenly goes up you have the potential for a short squeeze where short sellers – seeing the value of the stock they need to buy back spiralling – rush in to buy before it rises further and inflicts even greater losses on them. The only problem is that if there are lots of short sellers – which is the case for GameStop which until recently had been one of the stock market’s favourite whipping boys – all these purchases drive the price up further.
After a few false starts last year /r/wallstreetbets has finally managed to coordinate a massive decentralised campaign to push up the prices and short sellers lose their shirts. Meanwhile, a few traders are making huge profits. Buying low and selling high is the most basic way to make a profit there is and users of /r/wallstreetbets have managed to massively increase their ability to do so, and their leverage, via one of the forum’s favourite financial instruments, options. If one were to buy a call option, which for a small fee gives the right to buy certain stocks at a fixed price in a certain time frame, when the stock prices are low buy at this low set price when the stock price shoots up and then sell the now massively more valuable stock the potential profits are huge. This is exactly what some of the cannier /r/wallstreetbet users, such as Roaring Kitty, have done.
However, this is not just a tale of canny retail traders making a killing – it is also the story of a massive bubble. Even if one accepts that GameStop was undervalued there is now way that its worth the nearly $25 billion of its – extremely volatile – market cap, aroundthree times the value of Rolls Royce.
As the price goes nuts big players are piling in hoping to make a quick buck and so are more and more retail investors as the story GameStop’s stock goes viral on social media and is reported on by large press outlets, driving prices even higher. Making a quick buck seems to be the motivation for many retail investors but so is fun by the looks of it, in keeping with /r/wallstreetbets openly casino-like ethos. Trading apps like Robinhood present retail traders with a gamified experience. The potential for the GameStop short squeeze to make Wall Street firms lose their shirts to retail traders adds to the appeal with /r/wallstreetbets abounding with posts celebrating the fact they forced a major hedgefund to accept a bailout. Some are even prepared to stomach losses in the name of this with users posting the details of their riskiest trades and subsequent losses a frequent source of comedy on the forum – though one imagines many who get in or leave too late will be less sanguine.
GameStop’s wild ride is the direct result of online meme culture. Proliferating on social media sites more and more people have piled in further spurring its spread with at least part of the appeal being in on the joke. The dipping of chicken tenders in champagne by Roaring Kitty only makes sense in the context of tendies, short for chicken tenders, being slang for gains on /r/wallstreetbets – which is based on old self-deprecating 4Chan jokes about the forum’s users basement dwelling social inadequates demanding this specific fast food from their mothers.
Now, just as Pepe the Frog went from joking symbol of sadness to a symbol associated with the online far-right, the meme has taken on a life of its own. A ceremonial dipping of processed chicken in alcohol is now helping drive a corner of the market – is this what Keynes meant when he talked about animal spirits?