Top 10 Reasons GameStop Could Keep Going Higher
Disclaimer: This post does not constitute financial advice. Author has no position in GameStop. Do your own due diligence before making an investment.
GameStop rallied an impressive 51% on Friday. But a lot of investors think it could go higher. It’s impossible to know for sure but here are some of the theories.
1. The stock is already heavily shorted. It’s impossible to know for sure exactly what percentage, but it’s already hard/impossible to borrow at most brokers. There’s probably also some naked shorting going on. Since it’s already heavily shorted, it can’t really be shorted any harder. Brokers will also be reluctant to let their clients open new short positions, since the stock is too volatile.
2. All of the call options on Friday the 23rd ended up in the money. Outside of a buyout, this is extremely rare. This means millions of shares will end up in the hands of bulls next week.
3. All of the excitement from this meteoric rise will translate into higher sales. Some people were barely aware that GameStop was/still is a thing. Now the company is trending almost every day. All of this hype will generate more hype which leads to more customers.
4. GameStop could print shares and pay off their $1.15 billion in debt. This would only take about 25% dilution. That would drop the price to $65 to $48, which is still a lot higher than it was five years ago. ($30.82 on February 1st 2016.) Eliminating the debt gets rid of a large bear thesis. Less bears means a higher stock price.
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5. GameStop could print shares and buy cashflow. You see this in biotech all the time. Big companies swallow tiny companies with promising pipelines.
6. GameStop could print shares and buy some speculative investments. If GameStop is really determined to switch to a digital model, they might buy some start-ups. It would be good to get some new blood in there. They could take a gamble on some “cheap” companies with emerging technology and try to take on the digital behemoths like Steam and the Google/Apple app stores.
7. Some margin calls for Friday’s jump haven’t gone out yet. People who were short on Friday might be forced by their brokers to cover on Monday.
8. The cost of borrowing GameStop shares continues to rise. The higher the cost to borrow, the more likely shorts are to close their positions. At a certain point, it becomes too expensive to borrow shares. Even the short thesis is correct, the borrowing costs might eat up all their profit. Short-term short sellers could be right and still lose money if the stock doesn’t drop enough.
9. Management is making strategic changes to the core business model. This might pay out handsomely in 2021. Revenue isn’t a problem. GameStop is doing north of 7 billion a year. It’s their expenses they need to shrink. With Covid-19 destroying most retailers, GameStop might be able to re-negotiate the rents on existing, profitable stores. This will increase cashflow in the future.
10. This has turned into a story of the rich vs the poor. And the poor won by sticking to Wall Street and the market makers. It’s become something to root for. Buying a few shares of GameStop is like buying merchandise for your favorite sports team. It supports the organization. The stock keeps going up, which increases the excitement, and leads to more buying.
