GameStop's Power Surge: Will WallStreetBets Or The Short Sellers Come Out On Top?

GameStop Corp. GME shares soared another 40% on Friday to a new all-time high, and a spat between GameStop short seller Citron Research and an army of speculative online GameStop traders appears to have gotten personal.

Left’s Allegations: On Friday, Citron editor Andrew Left tweeted that he will no longer be publicly commenting on GameStop out of concern for his family.

“We will no longer be commenting on GameStop, not because we do not believe out investment thesis but rather the angry mob who owns this stock has spent the past 48 hours committing multiple crimes that I will be turning over to the FBI, SEC and other government agencies,” Left said in a tweet from Citron’s new account. Left said he will be using the new account while Twitter investigates Citron’s main account, which Left claims was hacked.

“This is not just name-calling and hacking but includes serious crimes such as harassment of minor children,” Left said.

Related Link: Citron's Andrew Left Says GameStop Is 'Pretty Much In Terminal Decline'

Left’s Thesis: On Thursday, Left discussed his GameStop short position and $20 price target on Benzinga’s ZingerNation Power Hour.

“People just want to buy the stock without even thinking about the business,” Left said.

While he understands people’s fanaticism surrounding Tesla, Inc. TSLA, Left said GameStop is completely different.

“For people that were fanatical about Tesla, I got that. It was a great product, changing the world,” he said.

“But to have a mall-based retailer that’s actually failing, doing poor, trading at all-time highs when it comes to valuation...If you believe they’re going to hit their numbers, they’re trading at next 12 months 42 times EBITDA, and normally it would trade at 4.”

Prior to the pandemic, GameStop reported a 3% drop in revenue and a $673 million net loss in 2019. In the third quarter of 2020, the company reported an $18.8 million net loss and a 30.1% drop in revenue.

Pump-And-Dump Schemes: Despite the bearish fundamental trends in GameStop’s business, a large short squeeze has sent the stock soaring 360% in the past month to new all-time highs. One of the driving forces behind the squeeze appears to be online communities of high-risk speculative momentum traders, such as the Reddit community WallStreetBets. These communities are the latest version of a classic trading strategy known as pump-and-dump.

Pump-and-dump schemes involve selecting stocks that have low liquidity and/or high short interest and organizing a large group of people to buy the stock all at once, creating a temporary spike in share price that has little or nothing to do with the company’s underlying business. The pump-and-dump strategy was highlighted in the 2013 Martin Scorsese movie “The Wolf Of Wall Street,” which told the story of convicted fraudster Jordan Belfort.

When Does The Party End? Benzinga’s PreMarket Prep co-host Dennis Dick discussed the crazy trading action in GameStop on Friday morning’s show.

“There’s 1.9 million people in that WallStreetBets thread,” Dick said. “They all seem to be talking about GME. I’ve never seen that many people talking about the same stock.”

He said that many people all buying a stock at once can certainly create the kind of price action happening in GameStop this week.

“I don’t know when the party ends because obviously it’s been pushed by Reddit community.”

Dick said he is personally bearish on GameStop.

“I think Left is right with the $20 price target eventually, but I don’t know the path to get there…I’m not shorting it. I’m not going to fight that Reddit community” he said.

In the near-term, Dick said GameStop’s share price is likely headed wherever WallStreetBets wants it to go.

“Personally, I don’t like the fundamentals of the company. I’m not buying it in my long-term portfolio, but fundamentals are meaningless on this stock right now.” Dick said.

More Targets Ahead? So far, the GameStop pumpers have certainly gotten the best of Citron, and CNBC’s Jim Cramer said these online communities are likely to continue to target additional stocks as long as their strategy is working.

Cramer recently pointed out a similar pump that is currently happening in another mall retailer, Bed Bath & Beyond Inc. BBBY. Bed Bath & Beyond shares are up 50% in just the past two weeks

“Like it or not, right now we’ve got a bull market in short busting, and I bet you’ll see more stories like GameStop and Bed Bath,” Cramer said on his Jan. 14 show. “I actually don’t like short bashing and stuff like this feels incredibly sketchy to me.”

Benzinga’s Take: Love it or hate it, there’s no question the short squeeze pump-and-dump strategy is working like a charm with GameStop. However, successfully timing the entry and exit points in highly volatile short squeezes can be extremely difficult, even for professional traders.

GameStop trades around $60 per share at publication time.

Photo via BentleyMall on Wikipedia.