GameStop Shares Plunge 60%, Reddit Favorites Dive

03 Feb 2021 · 3rd Party Analysis

GameStop Shares Plunge 60%, Reddit Favorites Dive


In Summary

  • GameStop shares slide as the retail buying frenzy cools down
  • AMC, silver drop, while Reddit traders scramble to reckon with the turmoil

The poster child for Redditors, GameStop, dropped 60% on Tuesday and closed below $100. The stock’s rally, which brought the market valuation higher by 1900% in less than a month, took a significant hit this week. For the past five trading days, shares of the company went down by nearly 75%. Other favorite Reddit trades, AMC and silver, also tumbled.

GameStop closed Tuesday trading at $90, down $135, or 60%, bringing the total drop from its peak at $483 to 81%. Pre-market trading on Wednesday shows the stock will open some 5% lower. In August last year when GameStop was worth $4.50 a share, the stock was getting little to no attention from the market. Given the small market cap, some investors believed that the stock had the potential for growth and drove it up to about $40. The move caught the attention of some hedge fund managers who decided the stock does not have the fundamentals to be worth $30-$40 and went short on it. This was followed by a group of retail traders piling onto it to “take the stock to the moon” and punish the short-sellers.

Presently, the retail crowd remains in the spotlight and has also garnered the support of Tesla CEO Elon Musk apart from entrepreneur and investor Mark Cuban. Both seem to favor what the trading community is trying to do. Mr. Cuban addressed Reddit traders yesterday and advised them to “hold the stock if they can afford to”.

The GameStop Debacle Prompts Discussions Amongst Regulators

As GameStop went mainstream and more people rushed to buy the stock, other companies like AMC also captured the public’s attention. AMC, a movie chain theater, was trading at $2 at the beginning of January. By the end of the month, the stock was worth close to $20, marking an increase of almost 1000%. On Tuesday the stock closed down at $7.82, marking a 61% drop from its highest point at $19.88.

Silver is another asset at the crosshairs of Reddit traders. The metal climbed to an eight-year high on Monday, reaching over $30. On Wednesday, silver is trading below $27 after slipping by more than 7.50% on Tuesday.

As the Reddit favorites stumble, the online horde that raced to buy is now wavering between admitting defeat or “holding the line”, as they say to each other in an attempt to counteract the financial turbulence. Many traders who were lured in by the seemingly easy way to turn a profit continue to hope that the hyperinflated stock would turn around.

The heightened speculation in individual stocks and the risks taken by retail investors has caught the eye of regulators. Treasury Secretary Janet Yellen has called a meeting with financial regulators to discuss the recent volatility in the financial markets caused by the GameStop trading activity. The meeting, expected to take place as soon as Thursday, will analyze whether the “recent activities are consistent with investor protection and fair and efficient markets”. Ms. Yellen will meet with officials at the Securities and Exchange Commission, the Federal Reserve, the New York Fed, and the Commodity Futures Trading Commission.

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