The GameStop (GME) saga is certainly unprecedented, at least in some ways, but some have ascribed an anti capitalist narrative to it that really isn't accurate. I have actually followed the WallStreetBets Reddit sub since late 2019, back when it had fewer than a million members. While it may have some complaining of 'hedge fund manipulation', it is anything but anti capitalist. Political discussion is officially not allowed on the sub, but I would describe the users as generally pro Trump. Moreover, discussions on the sub are laced with pejorative use of the words 'gay' and 'retard', and the humor that dominates the sub would be found to be offensive by many on the political left. In fact, what permeates the sub more than anything else is an idolization of wealth. In fact, Martin Shkreli ("Pharma Bro") was supposedly active on the sub before going to prison. I can't confirm whether Shkreli really posted on the sub, but I can say that he is still well regarded by WallStreetBets members. I don't really state these things to say that I have any ill will toward WallStreetBets members, I think a lot of them are just young people who might be a little misguided, but my point is that the narrative that some people have ascribed to them is not accurate.
The second point that must be made, and perhaps the more important one, is that people should seriously consider whether demanding that Robinhood allow unrestricted trading on GME is irresponsible. The most revered style of trade in the WallStreetBets community is the 'YOLO'. This generally means a high risk/high reward options play that someone places a large amount of money into. Often, the implication is that they are using all the money available to them. In some cases, this includes maximum margin, student loan money, and maxing out credit cards. Granted, this may just be talk, but in the case of GME, the fervor is so intense that I think many actually did this. I don't see any reason that Robinhood would want to protect hedge funds. The reasons they stated for restricting trading appear to be true. Ironically, the first time Robinhood and WallStreetBets were in the news together, it was because a WallStreetBets user had opened a box spread position that he didn't understand the risks of. It put him about $58,000 in debt, and Robinhood was harshly criticized for allowing such high risk trades on its platform.
This brings me to the third point, the question of how this will all end. There are plenty of financial journalists doing much more in depth analysis than I have, but I will make a few comments about the future of GME. Firstly, many people have referred to a hedge fund going bankrupt, and this needs to be corrected. Melvin Capital and Citron both remain solvent after closing their short positions on GME. According to S3 Partners, the value of GME stock held short is about the same as it was before the short squeeze. Many on WallStreetBets are convinced that Melvin Capital didn't really close their position. This doesn't make sense, because then there would not have been a short squeeze. More likely, is that other hedge funds have taken new short positions. It is likely that the new short positions were taken by larger funds that have calculated the risk of another short squeeze, and feel confident. Given that the stock has gained about 600%, one could calculate that generating another short squeeze would require six times the money. Moreover, some of those GME holders might be paying 18% interest on the credit cards they used to finance their purchases. And of course, I can't end the discussion without looking at GameStop's fundamentals. I compared GME to four companies with very similar market capitalizations. (Total Equity is most recent quarter, net income is last reported annual net income)
Company Market Cap Total Equity Net Income
Old Dominion Freight Line (ODFL) 22.8B 3.17B 616M
SVB Financial Group (SIVB) 22.7B 8.22B 1.21B
PG&E (PCG) 22.7B 20.8B -7.64B
Gamestop (GME) 22.7B 332M -471M
Coupa Software (COUP) 22.4B 413M -90.8M
Surprisingly, GME doesn't look too bad in this group, but at the rate it is loosing money, total equity will be negative before the end of the year.
There is another discussion that could be had about whether short selling is actually bad. The upward pressure when short sellers buy to cover counters the downward pressure from the short sale, so I don't think long term investors should be concerned about shorting. In the end, companies don't go bankrupt because of short selling or a decline in stock price generally. Companies go bankrupt because people stop buying their products.
