The fundamentals of GameStop do not merit a market capitalization of $17 billion. It’s a retail store selling physical video games in the year 2021. I should probably end the article right there, but there’s so much more to this story — an incredible discovery, a backward-looking business, vast and unfounded conspiracies, an entire subculture that you may never understand, and a dangerous asymmetry of individual incentives and transparency.

I’m not even talking about the first frenzy in January of 2021, which drove GameStop’s market capitalization over $20 billion and which you surely heard about and did not care enough about to really understand. That’s fine, it doesn’t actually really matter to you. But it’s important you understand it for this to make sense. I wish I could go full Margot Robbie in a bathtub and explain it, but you’ll have to make do with me in the shower instead:

So, then what? Like I said in the video, GameStop stock (GME) crashed and a lot of these retail investors trying to make a buck out of it lost a lot of money — especially if they bought as the stock was nearing its heights. But, it only crashed down to a $40-$50 share price, still many multiples above its value in 2020. And a lot of them continued to hold, hoping for a return to value. About a month later, it started to tick back up. 

This is where I entered. The subreddit r/WallStreetBets was the dominant public forum cataloging the retail investing side, where a lot of folks had poured thousands of their own dollars into GameStop shares, “hodl”ing (holding) through every dramatic drop, in the promise of “tendies” (gains). I entered on a down day, trying to game the wild fluctuations that occurred at the end of February.  I had been reading the r/WallStreetBets threads to get up to speed after the initial surge in January, and after the February run began, I figured I could reasonably enter for a profit thanks to the volatility alone and an educated guess as to the pattern of the stock’s price in the market.

It’s tempting too. The Reddit threads are flush with comments by retail investors claiming they bought another several shares whenever it dips and encouraging others to do the same, as well as countless posts talking about how later in the day the in-the-money options would push the stock up, that there was a war against hedge funds and short ladder attacks were being conducted to drive down the price every time it would plunge. “Do not fucking sell” said one member, as the stocks decreased for the day; “Big options activity, $300 by Wednesday” asserted another. There were the assurances that the after hours trading would drive the price up, that the stock was legitimately valuable, or that another impending “short squeeze” would force a dramatic increase in price once more. 

The evidence did not point to these things. It pointed to an inflated valuation based on a supposed game of brinkmanship between retail investors and hedge funds. There were other institutional investors playing along too, on both sides of the so-called battle just as in January, trying to make a dollar off of it, but the conspiracies ran wild on forums and on the larger Twitter and r/WallStreetBets community.

The Blame Game

You probably already heard that Robinhood was in cahoots with the hedge funds in stopping the trading during the initial skyrocketing prices of GameStop stock in January. That’s not really true, of course. The real story has to do with regulatory compliance and collateral requirements, with some degree of fault on Robinhood for weak communication around the decision. But that didn’t stop a legion of home-grown Reddit investors from implicating a grand cover up. 

Suspicions of illegal market manipulation by hedge funds were used as a frequent scapegoat for falling prices. It was taken as a given that the corrupt media were in bed with Wall Street, trying to beat down the stock on their behalf. Michael Jordan was invoked and then exonerated. And increasingly delusional, indiscernible, or specific theories would languish in the ether.

But the worst days were the most interesting. Just like after the first crash, the cracks in the subreddit began to show. GME devotees cast blame on each other for selling off shares, they plead to redditors to cease propping up other meme stocks like AMC (which had a smaller, related set of runs in this same period), and any posts that presented bearish outlooks on GameStop were beat down without much room for evidence. Even within r/WallStreetBets at large, the GameStop fanatics often stood apart from the subreddit at large; one need not search deep within the subreddit’s daily general discussion thread to note a striking bearishness regarding GameStop as opposed to the same day’s GME-specific discussion thread.

On its best days, the community could thoughtfully articulate a theory as to the stock’s movements, but it had to be pro-growth. FUD — fear, uncertainty, and doubt — about the underlying fundamentals of the business or that the stock would not eventually reach its predicted heights was repressed or attacked. 

As March drew on, users took to theorizing impressive gains in the price once President Biden signed the stimulus bill, which would issue $1400 checks to many Americans. This theory made sense. Having additional cash flow made it easier for me to return to retail investing during the pandemic — this was a rare hypothesis that had a solid case for an increase in valuation, and thus would go unimpeded as we all impatiently waited for it to pay off. This is a theory you can buy into. If nothing else, stimulus checks weren’t likely to send the stock price down.

Ride the Wave: The Dumbest Thing You’ll Wish You’d Done

Some of the investors got more innovative, using options to increase their leverage in these movements. To understand how this works, I couldn’t find behavioral economics expert Dr. Richard Thaler or international pop star Selena Gomez to explain — so, you’ll have to indulge me and my cat:

Many investors purchased call options with an $800 strike price, which was the highest possible strike price available at the time. Their being out of the money by a multiple made them comparatively cheap to options that paid off if the stock rose by “only” 50% in a week. As February stretched into March and on, discord spread regarding purchasing options: does purchasing the options help the “hedgies” (r/WallStreetBets lingo for “hedge funds”) by allowing them to collect the premium, while doing nothing to maintain the baseline price as no retail investors are holding the shares?

The use of options, especially out-of-the-money ones with a high strike price, also allowed the potential for a gamma squeeze, which occurs when a stock increases in price very rapidly. This increases the value of call options on the stock, especially out-of-the-money ones. As more retail investors piled in, they were able to drive up the price of call options that could have been used by those shorting the stock as a hedge. The increased demand for call options increases the demand for actual shares as you buy more shares to sell the call options, causing the stock to increase in value further: a gamma squeeze. After the success in January, r/WallStreetBets can be found arguing whether buying calls is a meaningful way to continue to increase the price, or whether simply buying and holding shares is a way to continue to build up the floor on the shares as investors wait for the fabled day of reckoning.

Options, or, more specifically, put options, are also the only way for institutional investors to take a short position on the value of the stock.1Technically, if you’re selling call options, you often have some interest in the price declining if you’re just attempting to collect premiums. But, since you own the shares, this is more nuanced: you want the shares not to increase enough in value so that whoever purchased the option from you cannot cash in. The types of brokerages many of these retail investors use do not allow direct shorting of stocks, due to the high potential that they may not be able to cover any losses; so put options are the best way for retail investors to cash in on a stock falling in value. 

Profiting off of all of this can happen at any point. The truth is that the volatility of the stock means retail investors, as well as hedge funds, could profit with minimal research so long as they had patience, could stomach the volatility, and would keep an eye on what was happening to the price of the stock from day to day. Over the course of one month I took five separate positions in GameStop, both long and short, for a net profit. Not every day was comforting, and some nights I slept better than others, but it’s like the apocryphal quote: “you can’t stop the waves but you can learn to surf.”

Moral Hazard, Moral Hazard Everywhere

When you’re down a few hundred dollars, you start to really think about the psychology of it all. No signal mattered in the minds of this community — or at least, those willing to post to the threads. These investors have a pretty compelling interest in getting as many people as possible to buy in and raise the price in hopes of recouping their gains of January and bowing out easily, which it seems plenty did. Eventually the price surged again past $300, before crashing down only minutes later in what was an incredibly volatile, and an incredibly exciting, day.

It was easy to hop in at various points, read the queues, put some money in on the stock when it was low, and wait for it to jump up days later for a profit. Predicting the days of big moves largely revolved on semi-thought out analysis of how many short positions could have come due on a given day, or — more accurately — based on major events that drew attention back to the stock: congressional hearings on both March 9 and March 17 corresponded to large amounts of focus; major announcements regarding the company did the same (and a big jump in the valuation); as did the build up to (and aftermath of) the key March 23 earnings report.

Not every moment or downturn was easy — but as long as you could ride the wave, buying high, and selling low, there was a method to the madness. The fundamentals didn’t matter. But none of them seemed to care, the excitement was that it was a shared experience among online communities: that the lows were good days to get in on the action and hold the line, and the highs were worthy triumphs in which you could see your brokerage account balance jump up by thousands of dollars. 

Some believe there’s yet more potential for a squeeze, that the real short squeeze “hasn’t happened yet.” And other predictions of another upturn based on how the pattern of the stock’s valuation has progressed, for example, are abundant. “GME is a meme stock, meaning it does not function like other stocks,” claims one big-brained theory — while an equally as insightful one notes, “you can demand what ever price you want for GME… potentially the greatest transfer of wealth in human history is but days or weeks away.”

You can come to your own conclusions on whether any of this is legitimate but if you follow the GME threads of r/WallStreetBets long enough, you’ll find yourself in an echo chamber. It can seem tempting, but I had to remind myself of the position that those telling you these things have taken, how much they have on the line. When only you know your financial position, you have questionable incentives to produce quality investment recommendations and this information asymmetry begets moral hazard. Tragically, world-famous chef Anthony Bourdain is no longer with us, so I hope the last in my series of homages honors him justly by explaining moral hazard:

For what could sometimes be considerate, intelligent research on the state of various positions and obligations and how they could lead to further squeezes if retail investors simply held their shares, one factor was often ignored: the assumption that everyone was really in this together. Some are. Some absolutely are. And within the daily GME megathreads, the cultish nature of their language and interaction feel like the preachings of a common faith. But no investor ever truly knows the stake of any other and a theory from one poster that the value is certain to increase if everyone buys on a specific day doesn’t hold quite as much weight were you to learn that investor owned an out-of-the-money call expiring that week. Data from Wealthsimple, a Canadian brokerage, found that the average GME trader on their platform held the stock for only 4.5 days and 67% of them lost money.2As of February 19, 2021. Not quite the “holding to the moon” that the r/WallStreetBets community espoused.

At the end of the day, it’s a bunch of people who had a definitive interest in seeing the stock price rise, egging each other on to hold or keep buying, with fidelity for a select few investors who had done some degree of due diligence. The incentives are skewed, transparency is lacking, and the buy-in is too pervasive to counter with a contrary narrative on the stock.

Game Over

Michael Burry (a real guy, who is also played by Christian Bale in The Big Short) clocked an undervaluation when GameStop was trading at $4 per share years ago. After momentum built and retail investors noticed the potential for a short squeeze, there was proper research and a compelling case for what happened in January of 2021. It was all well executed, but the potential for a short squeeze itself does not make for a strong company.

You’re welcome to do your own due diligence regarding an accurate valuation for GameStop. But bear in mind that a valuation even above just $10 billion (around if GameStop were trading at $150/share, still significantly higher than it has ever been in its history, including in the mid-2000s) would make GameStop a more valuable company than grocery store giant Albertsons ($9 billion in March of 2021), Bed Bath & Beyond ($3.5 billion), Nordstrom ($6 billion), New York Times ($8 billion), Dunkin Brands ($9 billion), and Hyatt Hotels ($8 billion). Let alone that the valuation of nearly $23 billion it found itself at during the short squeeze, and which so many adherents claim is still an undervaluation, makes it more valuable than the Fox Corporation ($22 billion), Kellogg’s ($21.5 billion), MGM Resorts ($18.5 billion), and a large swath of automobile companies and airlines.3Valuations as of March 2021.

Despite a planned transition into more digital sales, GameStop faces some truly remarkable challenges. The company is down-scaling, burning through cash, and its ability to transfer quickly to digital sales is marred by a heavy retail load. It underperformed revenue expectations in its last earnings report, losing $215 million in the year ending February 1. 2020 was a blockbuster year for the video game industry, but because digital sales of video games have eclipsed physical sales, and because of the decline of retail in general, GameStop took a hit.

Even amongst and following the events of January 2021, GameStop has struggled with internal issues. Their in-store staff hours have been reduced after a pretty devastating year all around for the retail employees. A year which, by the way, included a challenge to their stores to create the best TikTok dance video, for which the winner would be awarded (among other things) “10 additional labor hours to use during Black Friday week!” GameStop employees tend to make around $11/hour, less than at Walmart or Amazon, and any job-review site will present stark anecdotes of low job satisfaction.

And even with former Chewy CEO Ryan Cohen entering the picture, it’s unclear that GameStop will be able to catch up with companies like Valve (owner of Steam), Microsoft, or Sony — all established companies in the online streaming industry, each with a more diversified interest than selling video games.4Including Valve, who also makes video games. Not to mention inbound competition from Chinese companies like Tencent, which is the largest video game company in the world. No matter Cohen’s planned “transformation” for the company, it will be hard to innovate from over a decade behind the curve, against such major companies. It’s not like the signs weren’t there. The truth is that GameStop’s downfall reflects a failure of foresight that will be nearly impossible to recover from, even if they manage to offload over 5,000 retail locations. If they’re lucky, a giant company will acquire them just to increase a more diverse brick-and-mortar footprint — but that’s not going to happen with an inflated valuation. Instead, Cohen may try to use the newfound notoriety for the chain to create “the Amazon of gaming.” Even if you ignore that Amazon already sells video games and is releasing its own video game streaming service, if you’re trying to become “the [company name] of [industry],” you’re at least sort of resigning yourself to being second best. That doubles for if you’ll be competing with those companies directly.5You don’t hear Lyft going around claiming “we’re the Uber of ridesharing!”

Like Blockbuster with Netflix two decades ago, GameStop likely could have prevented its demise by acquiring Valve or maybe even a nascent Amazon, innovating and acknowledging where consumers were headed instead of committing to an archaic retail-based, hard-media-focused business philosophy.6GameStop actually started a retail video store in 2004, so, no, they’re not exactly forward-thinking. But it didn’t. GameStop has plunged below mediocrity as a workplace, as a business, and as an icon of the industry. No amount of change this year will turn it around by the next.

The Only Thing Worse Than Being Dead… is Being Dull

I wish I had a positive takeaway — that GameStop was destined for a dramatic recovery; that it could transform into a service-based place for gamers to revel in a shared passion, a coffee shop for gamers or something. And I even wish that I could say that these ragtag investors screwed over the man and challenged the system. 

That may have been the case in January, but this isn’t January anymore. GameStop’s wave is losing momentum and that is dangerous. It’s not going to bring about systemic chaos on the financial system or anything, but the longer this ride goes on, the more will take note, and the heavier it will become.

If GameStop is a meme stock that doesn’t behave like other stocks as that one user claimed, it stands to reason that it must at least behave like a meme. Believe it or not, there is actually academic research on the subject of meme life cycles. If memes cease to receive feedback, or achieve transmission, they will start to fail — and as a meme and its mutations become less novel, the meme will become “stale.” Memes, more often than not, become tired and worn out as they become more mainstream or more corporate, and they die. This suggests that GameStop’s “meme stock” faces one of two fates, which close in from different directions.

CNBC’s Mad Money host Jim Cramer’s frequent criticism of the GameStop valuation is frequent feeding for r/WallStreetBets; it’s also the best way to illustrate these two fates. If Cramer shuts up and GameStop ceases to make headlines, GameStop may fade from neglect. Or, if Cramer endorses GameStop and your parents start buying in, GameStop may atrophy to banality.

As one or both of those fates close in, a lot of people have put a lot of money into GameStop, and an ever-increasing number are buying into the mythos too late for it to make sense. It may still work out for some of them, but even if that wave never manages to crash into the shore, turbulence will eventually dissipate to stagnation. 

For those still holding on, they may face the crushing realization that the only thing worse than putting a thousand dollars into a stock that crashed is putting a thousand dollars into a stock that everyone stopped taking interest in a week ago.

Nothing in this article is meant to constitute financial or investment advice. At the time of, week prior to, and week following publication of this article, the author did not own any position in GameStop.