The world has moved on since the first quarter of 2021. However, that quarter will go down in history as the period when Reddit group WallStreetBets triggered massive short squeezes in multiple meme names. Even now, it's tough not to talk about GameStop, meme stocks, and WallStreetBets in one breath. What happened during the GameStop short squeeze?
WallStreetBets and meme stocks are now a pale shadow of their peak. A documentary on the GameStop short squeeze was released in theaters in January. It won’t be surprising if, over the next few years, we see a mega starter Hollywood movie made on the topic, just like The Big Short and The Wolf of Wall Street. There are rumors that movies might already be in the works.
The GameStop short squeeze was a David versus Goliath battle.
Many touted the tussle between Wall Street firms and retail investors as the David versus Goliath battle and a “democratization” of stock markets. Indeed, acting as a cohort, WallStreetBets members almost led to the demise of Melvin Capital. Citron Capital, which issued short-seller reports for two decades, stopped doing so after the GameStop (GME) fiasco.
What happened to GameStop stock in 2021?
GameStop stock entered 2021 on a strong note after almost tripling in 2020 amid optimism over its restructuring and the pivot towards e-commerce. However, Wall Street funds weren't too convinced about the rally and went overboard shorting the stock.
An investor shorts a stock when they think that the stock price will come down. They can buy the stock at a lower price and make a profit. However, that wasn't going to be the case, and what transpired in the first quarter of 2021 was an epic short squeeze. At one point in time, GameStop’s short interest ratio was more than 100 percent, which meant that more shares were sold short than the outstanding float.
GME stock was an epic short squeeze.
WallStreetBets members pounced on the opportunity and went on a buying spree. The “diamond hands” or the “HODLers” wouldn’t simply sell their shares and as a result, the short borrow fees on GameStop exploded. Left with no option, shorts had to cover their positions at a massive loss.
As with a typical short squeeze, the short-covering added to the upwards price action. GME stock, which was trading below $20 at the beginning of 2021, hit an intraday high of $483 on January 28, 2021. However, that day, the stock closed at $193.6, which was less than half the intraday highs.
That day, Robinhood announced that it would block trading in meme stocks like GameStop—a decision that earned it the ire of several traders on its platform. Many people saw the move as a sign that the popular retail trading app was siding with Wall Street and ditching retail traders.
GameStop stock continued to plunge.
GameStop stock remained volatile with a downwards bias and by the middle of February, it was trading near $40—a fall of over 90 percent from its peaks. However, the stock soared again in March and traded above $200 that month. The stock surpassed $300 in June due to optimism about the business transformation and activist investor Ryan Cohen taking a more active role in the company.
However, these gains were short-lived and the stock soon came down. GME stock was among the biggest gainers in 2021 and several retail investors made massive gains on the stock.
While the stories of people making millions on their YOLO bets on GME stock have been making the rounds, like typical Ponzi schemes, there are many more stories of retail traders getting struck in GameStop at higher levels.
GameStop continues to fall in 2022.
Fast forward to 2022, meme stocks aren't as popular as they were in 2021. A lot of retail investors, especially those who made huge losses on meme stocks, have been getting disillusioned with WallStreetBets.
There has been a severe sell-off in meme names. GameStop and other meme stocks like Clover Health and AMC Entertainment have fallen sharply. Investors have sold stocks of speculative companies along with growth shares to seek the stability of mature and established companies.
With several fundamentally strong growth stocks trading at attractive valuations, many retail investors have ditched speculative meme stocks like GameStop and bought the dip in quality growth names.
Will GME stock hit its 2021 highs ever? We don’t know, especially since management has been frugal with the updates on the transformation and even stopped taking analysts' questions during the earnings call.