The stock price of US omnichannel videogaming retailer GameStop plunged 30 percent Monday this week, 1 February, closing at $225 from its Friday price of $325. But the real story of GameStop is not just about this recent plunge. It begins earlier. To provide perspective, consider that GameStop stock was trading at $18.84 at the end of 2020 and at $4.15 about a half year ago on 3 August. Even prior to the global pandemic, the stock had been trading in the single digits with a stock price of $5.88 on 3 January of 2020.
Meanwhile, following the continued rollout of the e-yuan, China’s electronic currency and the first central bank-backed electronic currency anywhere, the Indian government is considering establishing its own central bank-backed electronic currency and potentially banning cryptocurrencies such as Bitcoin.
In other news, an article in the Lancet, published last Friday, 29 January, explains that a key factor in the dynamics of COVID-19 spread in different countries can be explained by culture. A group of researchers led by Michele Gelfand uses Gelfand’s research on cultural looseness and the international data on COVID-19 to support a conclusion that countries that have tight cultures, i.e. countries that have strict norms and stricter punishments for deviating from those norms, are much more likely to have lower case counts and deaths from COVID-19.
This week, we talk about money, the pandemic, online communities and the challenges of managing platform businesses.
Games with Money
For context, let us look at the GameStop fundamentals. Company revenue was $7.96 billion in 2017, $8.54 billion in 2018, $8.28 billion in 2019 and $6.46 billion in 2020. Company net income was $353 million in 2017, $35 million in 2018. The company registered net losses of $673 million in 2019 and $471 million in 2020. The company was clearly hard hit by the pandemic but it is important to note that revenues had dropped even prior to 2020.
The company which sells games primarily IRL (in real life) had been steadily losing market share to online purchases and its share price had dropped from $56 in 2013 to $12.28 at the end of 2018. On 3 January 2020, the stock was trading at $5.88. On 4 January 2021, GameStop was trading at $17.25. The middle of January is when the games begin.
On 13 January, GameStop stock soared to 31.40, 57 percent from the previous day price of $19.95. On 22 January, Friday, the stock rose another 61 percent to $65.01 from the previous day’s price of $43.03. On Monday, 25 January, stock trading was halted nine times and the stock closed at $76.79. The next day, the stock closed at $147.98. Wednesday, 27 January, GameStop hit an all-time high of $347.51. The stock price plunged to $193.60 on Thursday and jumped to $325 Friday before closing at $225 on 1 February.
Clearly something strange is happening here. The share price changes are not reflective of business reality. But then, that is one of the things that we know. Share prices are simply a reflection of what price people are willing to pay in the market. In the case of GameStop, the price increase can be traced to a community of over six million people on a Reddit forum called r/WallStreetBets and the ease of transacting offered by the stock trading app Robinhood.
It started about a year ago when someone in the Reddit forum argued that the stock was undervalued. The community began to push the price up. Once the stock price began to go up, other investors, including institutions began to short the stock, essentially betting that the price would go down. Enter Robinhood. One of the important things to know about Robinhood is that it did not make only stock trading accessible, it made options trading accessible. What are options? Well, it is those securities that allow investors to speculate on the future prices of stocks, essentially allowing them to bet that a stock price will go down. The kicker? Options trading on Robinhood is free!
In fact, so many investors bet against GameStop that Matt Levine of Bloomberg pointed out that “Short interest is 71.2 million shares while GameStop has only 69.7 million shares outstanding.”
At some point, the narrative began to be about small players punishing short sellers. They succeeded probably even beyond their own expectations. As the stock price increased, these companies ended up having to buy stock at higher prices to cover their bets. Will Daniel of Business Insider reported that GameStop short sellers had lost about $5 billion as of 26 January.
The conundrum of free access
So what is the story here? One way to see this is that GameStop is simply another lesson in how out of control options trading can create unreal market situations. In fact, the global credit crisis was actually at least partially fueled by options.
But there is another even more concerning observation to be made. When markets become unrealistic, many savvy investors point to the actions of the mob, the unsophisticated investors who suddenly pile in during a bull run and panic when prices begin to go down. To address this, the stock market has put certain measures in place, including circuit breakers. Options have the opposite effect. They increase volatility. Historically, access to high-risk investments have been regulated by limiting access to high-networth individuals or simply by the difficulty of access. Robinhood changed this. Social Media, as evidenced by r/WallStreetBets, has also created what we can now see is a powerful player– arge online communities.
The story of GameStop is simply another iteration of the power of online communities. The availability of information and the ability of like-minded individuals to reinforce each other by building online communities has been seen time and again not just in business but in politics. When combined with the sheer access made available by online platforms, then we have created the possibility for great potential good—eCommerce platforms and social media have made it possible for even small businesses to access international buyers.
However, it is also possible to harness these platforms for misdeeds. Who should police these platforms? Do we rely on the individual ethics of users, or community norms and enforcement? Or should there be more? What is the responsibility of the platform owner?
As we face a world were money will flow through data lines and electronic currency will provide a paper trail of transactions, as we begin to see that the tightness of norms can truly have the power of life and death during periods of crisis such as a pandemic, the challenge of creating societal norms that enable good while preventing evil is one that we cannot afford to sweep under the rug.
The article by Gelfand et al. The relationship between cultural tightness-looseness and Covid-19 cases and deaths: a global analysis can be accessed online on https://thelancet.com.
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