Earlier this year, you likely saw headlines regarding GameStop’s share price going from around USD 10 per share to USD 500 per share and then back down to USD 50 within a few weeks. Driven by Reddit day traders, it was hard to miss their effect.
Figure 1: Price and Volume of Traded GameStop Stock, in USD
Source: SPCapital IQ
What does GameStop’s volatile share price mean for you?
The rapid rise of GameStop, despite poor earnings results and a number of sell side analyst downgrades over the period, demonstrates the increasing power of herd mentality and momentum on share prices.
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 increasing weight of non-traditional platforms and investors in determining share pricing.
Whilst this type of activity is more prominent in US markets at the moment, increasing funds on Australian retail platforms would indicate that Australia is likely to follow suit. Boards and CFOs can mitigate the severity of significant non-fundamental market movements by understanding and communicating the fundamental value drivers for their businesses. For acquirers of listed companies, filtering out market price noise prior to making an offer remains paramount.
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