Is GameSTOP going to STOP going up? Time to short

Second Sight Second Sight Analysis -- (Charlotte, NC 1/26/2021)

Short Call: Short $GME stock, buy puts, it's going lower.

Gamestop (GME) has had an epic short squeeze fuelled by Elon Musk's Tweet, sending the stock up near 250 after hours.  According to Google, the price at the close was 147.98:

The situation is being covered very well here at Zero Hedge we aren't going to tell you something you haven't already read.  But what's behind this short squeeze, how high will this go, and what is the company's real plan moving forward?  Let's start with the opinion of Short Seller #1, Mr. Left:

  • Citron Research is still short GameStop (GME+55%) in the face of the stock's wild rally driven by retail traders that have taken Citron's bearish call as a challenge.
  • "If I had never been involved in GameStop and came to this right now, would I still be short this stock? 100 percent," Citron chief Andrew Left told Reuters today. "This is an old school, failing mall-based video retailer and investors can't change the perception of that."
  • Left posted a video on Jan. 21 arguing that the stock, then around $40, was not in a short squeeze and would go down to $20.
  • GME shares are up 180% since then.
  • Left then said he wouldn't comment on the stock after attacks from an "angry mob."

In other news, during our daily LLC meeting, we were discussing an app we are building for short sellers ( and talking about "Who uses GameStop?" and a flash from my childhood appeared as a day dream, it was me in the 90's going to Blockbuster video to rent VHS tapes at a bargain price for 3 movies you could keep the whole weekend.  Blockbuster video had 'distribution' all over the USA too - and we all know how that ended.  Let's just examine what Game Stop really does.

The digital world

First, 100% of what they sell is digital.  Since the crazy COVID lockdowns, who is leaving their house, putting on a mask, and going out into the great snowy weather and buying a digital game for Playstation 4 that you can buy through your console?  People who aren't gamers need to understand that you can buy 100% of games and related add ons all through PS4 consoles.  There has been a huge trend to take physical meetings and make them virtual - why would during this trend people take something virtual and make it physical?

Dying mall trend brought to you by

Some shopping malls still thrive, but the majority are closed, bankrupt, or dying.  There is a market for physical bricks n' mortar stores, for example when you are buying clothing or shoes - it's very hard to shop online for shoes even with free shipping.  Many shoppers say the same for things like toys, boutique items, and items like tobacco and alcohol that have online sale restrictions (You can't ship alcohol without a license to do so).  But for software, and digital items, you don't see software stores in shopping malls, do you?  In stores like Apple and Microsoft, the focus is on hardware.  In office supply stores like Staples, almost no software except for Microsoft Windows, and a few games.  Why do stores stock 90% of their items with physical goods?  Because people shop for digital products online.

The Playstation Paradigm shift

When you get a PS4, you need to create an account, add a payment method, and complete a profile just to 'set up' the system.  You can skip it but 99% of people do it, because you need it to play against friends and buy games in the store.  It's all integrated so once your account is setup you can click and buy any new title which downloads automatically to your console.  Sony was extremely disruptive with their console model, investing money into the chip architecture, and marketing it as a home entertainment multi-unit.  You can use a PS console to play DVDs, watch home movies or photos, or use it as a computer using YellowDog Linux.  You can string multiple PS3's together to form a mini supercomputer.  It's more than a Nintendo.  Since the PS3 is more like a hybrid between a PC and a traditional video game console, the gaming paradigm has shifted.  Even in the PC gaming culture, services like Origin and Steam have online purchases accounting for most of their sales.  Come to think of it, I don't think it's possible to buy Steam games in a physical store.  In any case, most of the games are 'online' meaning you play against others online, it would be absurd to go into the store and buy and online game in a store.  Just take a look at how popular Steam is:

Top games by current player count
409,142 1,018,800 Counter-Strike: Global Offensive
249,676 597,119 Dota 2
130,813 185,171 Rust
73,396 100,319 Team Fortress 2
62,523 107,618 Tom Clancy's Rainbow Six Siege
61,258 130,938 Grand Theft Auto V
61,248 95,232 Rocket League
61,017 103,986 Path of Exile
57,410 112,896 Apex Legends
51,482 57,453 Stardew Valley

And we aren't even mentioning Pre IPO company Roblox, which is a new gaming paradigm ready to disrupt the gaming world.  So where does GameStop (GME) fit into all this?

It doesn't.

GameStop is a dinosaur, a remnant of the good ol' days of shopping malls and Nintendo.  In the 1990s at the peak of console gaming, the internet was only starting - there wasn't such a thing as 'online gaming' and yes, you HAD to go into a physical shop to buy games like DOOM.  There were BBS systems where you could get 0day WaRaZ (Software) mostly pirated, or cultural paraphernalia like Kurt Cobain's 'suicide note' (we all know who murdered him) and other interesting bits like the "Anarchists Cookbook."  In those days, places like GameStop were meeting places for geeks.

Those days are long gone, there are no more "LAN parties" - these were events where people would meet in person bringing their desktop computers or just NAS drives and exchange large sized files en masse such as photos, games, movies, or whatever.  Sometimes they would connect PCs and play each other, but again this was popular before the internet - now there is no need to leave your home and all games, even SimCity, are connected online.

Now let's be realistic, the Robinhood bulls are right - for now.  The price is reaching very high levels.  How high can it go?  We're not going to comment on the dynamics of the technicals because it's an unknown unknown, insanity is always fuelled by more insanity.  But it is interesting to note that the Tulip mania peaked in January until Feb 3 which was the exact peak, and then the bubble burst:

Let's take a look at some interesting data from - note the spike up in short volume on Jan 12:


This is End of Day data, showing only yesterday (25th) a huge spike up in the fee rate and the borrow available:


There is no telling how high this might go - but the fundamentals say this company is going to be the next Blockbuster Video of the gaming industry.  The move towards virtual digital business since the COVID lockdowns has only escalated.  With most international travel completely banned, and companies having a variety of lockdown policies for their employees ranging from work from home to sanitizing the offices, the usage of all digital media and virtual alternatives has skyrocketed.  The bulls of GME claim to buck this trend, and that their physical stores will be 'distribution points' - to what?  Some people are so afraid of COVID they are staying in their homes - and why not.  We have created comfortable prisons for ourselves and with the internet, online ordering, you really never need to leave your house at all.  Doctors now have 'virtual visits' which is the same as a Skype call, and many are asking why we weren't doing this for 10 years?

So what's really in the data on consumer spending?  Has COVID created a real dent in the economy, or have things just shifted around?  What got hurt the most, things like bars & restaurants, especially family owned, small businesses.  It's quite a shame, but our point here about GME is that most of the businesses that were hurt from COVID policies were those businesses that were 100% physical, things like restaurants with no take out, barber shops, fitness gyms and so on.  Restaurants that have GrubHub or take out have been booming.  Fast food particularly has exploded.

Consumer Spend Is Shifting to Ecommerce: The Untold COVID-19 Story

“Many of our clients are having their best sales ever over the last four to six weeks, even as compared to last Black Friday,” said Dean Dutro, cofounder of Portland, Oregon-based digital agency, Worth Commerce.

One natural skincare and beauty brand, Naples Soap, illustrates the challenge—and opportunity—many businesses faced in recent weeks. Prior to the last several weeks, the bulk of their sales came from several retail locations. With those closed, the company had to move entirely online. Over the last 30 days, they have tripled online sales.

So how is GameStop able to buck this trend? Are they going to compete with Steam, Origin, and others?  No, they tried that, didn't work.  

Back in 2011, GameStop purchased Impulse, which was one of the very few competitors to Steam at the time. It was rebranded as GameStop PC Downloads, which is probably the least interesting name GameStop could have given it. Three years later they shut it down. Even while it was running, they seemed to have no idea what to do with it. The company never made any visible effort to promote or improve the platform.

Admittedly, timing the top here is tricky.  But on the other hand, how high can it go? has always been interested in unusual data sets and anomalies in the markets - that's where the big value is.  Short selling is a more complex strategy but we believe it's more information rich; meaning that if you have a solid thesis of why a company should not exist, such as GameStop (GME) we believe that will eventually play out, as we saw with Blockbuster Video, Kodak, Enron, and other companies.  One of the biggest short signals is of course fraud, but it's the most obvious and least interesting (either there is evidence of fraud or not).  A fundamental argument about a Dinosaur like GameStop (GME) is far more interesting, especially when the bulls are so excited and no doubt high on hopium tonight, calculating how much they will make when the stock hits 1,000 and how many lambos they can buy.  There's no intelligence in getting high on excitement - in fact it can even cause your brain to fire on the wrong side (the irrational side) which leads to bad decision making, which leads to losses.

This week looks like the top, we will monitor the stock tomorrow but fundamentally we believe it will go to zero.  That's not to say it won't go higher but it will peak and crash to new lows at some point, because it's only mania and hopium driving GME higher.  Finally, a word from the short masters:

To get a Robinhood alternative for shorting stocks like GME checkout LevelX

To see the research for this investment thesis, or to get real time intelligence alerts - sign up for Second Sight our global macro analysis service for investors and active traders.

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Research & References

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