GameStop case study | Gamifying the stock market?

GameStop: What does the gamification of the stock market look like?

Figure 1: Price and Volume of Traded GameStop Stock, in USD
Source: SPCapital IQ

Earlier this year, you likely saw the headlines of the share trading activity for GameStop – basically going from $10 per share to $500 per share and then back down to $50 within a few weeks. Driven by Reddit day traders, it was hard to miss their effect.

What does the spike in stocks mean for a company like GameStop’s value?

The rapid rise of GameStop, despite poor earnings results and a number of broker downgrades of sell side analysts over the period, demonstrates the increasing power of herd mentality and momentum on share prices.

Affectionately known as the ‘Dean of Valuation’, New York University Finance Professor Aswath Damodaran noted that the trading frenzy in GameStop (and also AMC Entertainment) shares do not change the companies’ fundamental problems, and calls into question the long-term strategy for online investors who sparked the short squees in the stocks. Damodaran said he understands investors on sites like Reddit were motivated by a desire to cause financial pain for hte hedge funds that shorted GameStop and AMC.

“I’ve never been a fan of hedge funds. I don’t think many of them bring much to the table and they charge absurd amounts of money for doing so,” Damodaran said. “When I look at the investors who are driving GameStop and AMC, they’re pretty open about the fact they couldn’t care less about value. This has become a game.”

“The question for those Reddit investors I would ask: ‘What is your end game? What do you hope to get out of this?’” Damodaran said. He noted a desired outcome may be driving a few hedge funds that shorted GameStop or AMC shares out of business.

As humble valuers we aren’t weighing in on the philosophical or political merits of hedge funds or day traders, however, the clear overvaluation of GameStop and other stocks for non-intrinsic factors demonstrates the importance for boards and CFOs of understanding the value drivers and levers for their companies. This should assist with takeover defense and inform takeover/merger discussions.

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