Looking Back on the Gamestop/Robinhood Saga - Part 1

Some may say it all started in late January 2021 when retail investors banded together to drive the price of Gamestop stock (Ticker: GME) up by more than 1,800% in a few weeks. Others may argue that it started when reddit user Keith Gill (also known as u/DeepF***ingValue), along with infamous Hedge Fund investor Michael Burry, began publicizing large option positions in Gamestop in the summer of 2019.

I’d argue it started before any of that. Instead, I think it all began when Robinhood gave new users free Gamestop stock in exchange for opening a new account. The way this charitable act came back to haunt them is even worse than the time Michael Scott gave out gift baskets.

How it all began

It all started because Robinhood advertised how they would randomly reward you with one share of a stock ranging in value from $5 to $150 if you opened an account with them. In the fine print, however, 98% of users were receiving stocks valued between $5 and $10. At the time, GME was trading right in that range. The choice of GME stock to fill many of these offers was natural, as the majority of Robinhood’s user base were Gen-Zers or Millennials. Most of these customers had been buying Playstations and Xboxs from the video game retailer since childhood. As someone who rarely played video games, even I can attest to spending an entire spring break with a few friends creating a fake band on the game Rock Band called the Silly Puppies. In short, if you were going to give $5 of stock to these new users, GME was one that would resonate well.

In the summer of 2019 Michael Burry, made famous by the movie the Big Short where he was played by Christian Bale, publicized his optimism for Gamestop stock. This was heavily predicated on its current position of being one of the most heavily shorted stocks on the market. He noted that if the company executed a significant buy-back/repurchase, it could have significant upside. By repurchasing shares, companies can artificially increase their own stock price. In this scenario, it can directly act as a way to combat short sellers who want the stock price to decline, although it also requires a significant cash investment. Not soon after, Gamestop did indeed repurchase 38% of its stock.

All movements need leaders

In the midst of all of this, Keith Gill began posting to reddit his own optimistic position on GME stock with over $50,000 in call options. Gaining steady, albeit modest momentum, Gill also began posting on YouTube, under the alias ‘Roaring Kitty.’ He talked about other factors fueling his optimism, like the imminent release of the new Playstation console and its potential impact on Gamestop revenue. At the time, his following was limited to a WallStreetBets subreddit community that was hovering around one million users (and has since grown to above 10 million users at the time of writing this). All movements need leaders, and Gill was slowly setting himself up to be this one.

In the fall of 2020, one more development occurred; Ryan Cohen, founder of Chewy.com, bought 10% of Gamestop and joined its board. Suddenly, you had a community of Gen-Z and Millennials as shareholders (thanks to Robinhood), an influencer, and a famous anti-wall street guy touting the stock on social media. And now, the leader of one of the most successful ecommerce businesses of the 21st century is helping direct strategy. For the right observer, it was kind of like this.

The tension (and the stock) rises

By late 2020, all of this still wasn’t front page news. Although the stock had risen 300% in just one year, it was still one of the most heavily shorted stocks on the market. Wall Street was doubling down on their pessimism. It’s here where I think zeitgeist took over. I like to imagine a bunch of early Robinhood customers stuck in their homes during quarantine casually checking their accounts to find GME had made a noticeable uptick in value.

At the turn of the new year social media activity about GME started to explode. Posts from the WallStreetBets subreddit channel were consistently featured on the ‘popular’ page for their high user engagement rates. Posts focused on exposing hedge funds (often referred to as ‘hedgies’) and their short positions. Users were expressing their views that GME was headed for the moon. They even mocked Jim Cramer, the host of Mad Money, by saying 'I like the stock.' One hedge fund in particular, Melvin Capital, took the brunt of the social media barrage as the largest short holder of GME. You could see the tension rising.

Gamestop stock went from hovering at around $18 per share for over a month to doubling in value in the second week of January. Then in one more week it doubled again. And then it happened: suddenly, Gamestop was trading above $300 per share (roughly up +1800% in just three weeks).

I remember waking up that morning to messages on three different friend group threads all talking about GME. It was the talk of every news station around the world. To me, it felt like it had the same buzz as the first day of March Madness, where no one can work or even think about anything else. Later that day I created a Slack channel called ‘investing’ and in less than an hour 70% of the entire workspace member group (around 200 people) had joined.

Turning the tables with Gamestop stock

On Thursday January 28th, Gamestop stock reached a record high of $483 dollars a share. As a millennial, it felt empowering just to be a part of it. I literally sent my broker a note about how to get my GME shares as a stock certificate delivered to me. The reality for me (and many others) was the message it sent, not about (potentially) making money. In my decade of working in the securities industry I saw the mind-bending revenue institutional investors took from the market. To see retail investors banding together by the millions and turn the tables was simply amazing.

The day the music died

And then in the middle of everything, the music stopped. For the first time in history one of the largest brokers in the world, one that had championed this same group of people as its core customers, halted trading. Robinhood announced that they would be restricting all trading activity in GME stock. It kind of felt like this. And at the same time, you kind of knew it was going to end up like this. GME closed the day at $193.60 per share.

To be continued.