These are the words an army of Reddit-fueled Robinhood traders sneer to short-sellers near and far. You think GameStop (GME) shares are overpriced now? Wait and see how overpriced they are tomorrow.
GameStop shares were priced near $20 three weeks ago. As I write on January 26, they're priced near $150. The shares have moved from $40 to $90 and then to $150 over the past three trading days. (The shares were up $71 today. The party flowed into after-hours trading, with the shares up another $75.)
What gives? Is GameStop the object of an intense takeover battle? Has it discovered a cure for the COVID-19 virus?
No such luck.
GameStop is what it has always been: a retailer -- a brick-and-mortar retailer at that -- of new and pre-owned video games and video-game platforms. GameStop is what its name implies.
It's all pedestrian stuff for GameStop, but that fact alone doesn't preclude investment. What's pedestrian can make for a rousing investment if sales and earnings grow, and if they grow at a rate that exceeds most investors expectations deep into a future more far than near. (See Target in recent years.)
The case is otherwise with GameStop's pedestrian business: Revenue trends lower year after year. Earnings have trended lower until they are no longer earnings. Losses have been the norm since 2018; few Wall Street analysts expect it to be otherwise through 2023.
GameStop shares were trading near $5.00 only six months ago. They were trading near $20 a few months later. Many investors, those mostly with a value bent, thought they saw an opportunity. GameStop, they reasoned, is infinitely more like a Blockbuster than an Amazon. The shares were overvalued at $5.00; they're grossly overvalued at $20. Time to short.
And short, they did. The short interest at the end of December exceeded the number of shares outstanding. Every available share had been borrowed and shorted, and at considerable cost. Sources I read say the borrowing cost to short GameStop shares exceeds 20%.
Why has the share price assumed a moonshot trajectory? Why the disregard for prudent and reasonable valuation?
Such an enormous short position concurrently creates huge potential demand for the company's shares. Never overlook that risk. If you short when everyone else shorts, you better be damn sure the odds favor bankruptcy in the near future. If not, look out. Nerves begin to tingle as the share price trends higher, and then they fray as the trend extends. A singular though begins to warp the short-seller's reality: buy before everyone else starts buying. Of course, your fellow short-sellers are infected with the same reality, so everyone starts buying to cover their position.
Seasoned traders understand the dynamic all too well. They add to the mass of buying humanity with their own buy orders. They buy on no fundamental precept, except the fundamental need to force a short-seller to cover his rear-end before he is bankrupt.
After a few days of 50% and 75% gains, the initial army of GameStop short-sellers is vanquished. Time to recruit a new army. Recruitment articles surface on Seeking Alpha and other investment websites popular with the hoi polloi. "OK, now is the time," the websites' self-promoting scribes declare. "GameStop shares were overvalued at $20, now they are idiot-proof overvalued at $100. Now, let's short. The price can't possibly go higher."
Except that it can, and it will.
The prospect of an easy profit again hangs before the new platoon of hoi polloi investors like the prospect of an Anglerfish's easy meal hangs before the unsuspecting sardine. In both instances, it can be over in a flash The sardine is gone, and so are the investor's prospects of an idiot-proof, easy profit.
Instead of selling at $100 and dreaming of covering at $10, our intrepid GameStop short-seller starts to fret over the prospect of covering at $120, then at $150, then at $170. When the price breaks $200, he's out with his 100% loss. Best to leave with a 100% loss. After all, the best the short-seller can expect is a 100% gain.
Another platoon of short-sellers surges to the front lines. They, too, have been fortified by the same sophistry of an idiot-proof profit. And they, too, become someone's meal.
So, when does it end?
It could end tomorrow, or it could end six months from tomorrow. No one knows until it ends, and then everyone knows, because it will end with the suddenness of the sardine's life.
With the short-sellers vanquished, the buyers know that the shadow demand no longer exists. All it takes is one conspicuous "Dutch" boy to pull his finger from the dyke with his sell order. The market is soon flooded with sell orders.
I empathize with the GameStop short-sellers. They know what we all know: GameStop is a $10 stock at best. If Vegas casinos were to accept bets on GameStop's share price two years hence and offer only a binary choice ($100 or $10), the bets would overwhelm the lower number.
I learned long ago to watch such spectacles from a safe distance. Short selling is always a risky preposition. The short-seller confronts two intractable obstacles: profits are limited, losses are limitless. The share price can trend irrationally higher longer than the short-seller can remain comfortably solvent.