The Surprising Reason GameStop Is Trending

GameStop, the longtime brick and mortar video game chain, became a trending topic on Twitter after the company's stock surged to around $150 a share on Monday, up from $40 last Thursday.

This massive jump of GameStop's stock results from a conflict between investors betting against the stock, or short selling, and die-hard fans of the stock from r/WallStreetBets. Essentially, investment firms such as Citron Research have been borrowing and then selling GameStop shares with the expectation that the stocks would lose value. Once the value drops, investors purchase them back, earning a profit on the difference.

However, investors using this tactic to short sell stock need to be confident that the stock doesn't go up unexpectedly, as GameStop's has over the last few days of trading. If the stock goes up, investors need to repurchase the shares they have sold as fast as possible to avoid massive losses. The more the stock goes up, the more significant the losses will be. This means that a sudden spike on a stock with substantial investors engaged in short selling activity can result in a massive increase called a short squeeze, which is precisely what happened with GameStop.

All of this activity started when Andrew Left of Citron Research shared a video on Jan. 21 to give investors "five reasons why GameStop is going to $20." This prediction gave investors a reason to begin borrowing and selling shares to prepare for a short sell on the stock. However, the r/WallStreetBets community took this as their signal to try and drive up the stock price to initiate the short squeeze. Thousands of casual investors acted, driving the stock price up to $72 on Friday and its high of $159 on Monday.

All of this activity comes after a rough patch for the company. GameStop was already undergoing layoffs before its finances got hammered in 2020 due to pandemic restrictions and isn't expected to turn a profit until the 2023 fiscal year. Despite this, GameStop's stock has long been a favorite for speculation from the vocal community of investors on r/WallStreetBets. One Redditor, Delaneydi, posted a complex thesis on the underestimated value of the stock based not on "a turnaround or business expansion" but merely a "deep value play" back in March 2019. Another, Senior_Hedgehod, predicted that GameStop would be the "Biggest short squeeze of your entire life" in April 2020.

While it remains yet to be seen whether these stock gains will last or impact the company's future, it certainly has been an exciting week for GameStop. The company has been focused on revamping its online approach, hiring former Chewy CEO Ryan Cohen on Jan. 11. Hopefully, GameStop can use this momentum to their advantage.