GME Financial Conflict

• Financial conflicts can exist when 2 or more factions with opposing financial interests compete on a particular financial or market outcome
• There apparently exists an ongoing financial conflict over the share price of GME
  • One side, GME short sellers, also known as "shorts" or "bears", benefits financially when the price of GME goes down
  • The other side, GME shareholders, also known as "bulls", benefits financially when the price of GME goes up
• As the conflict has evolved, so too have the competing narratives put forth by both sides
• The conflict ends when one side capitulates, willingly, or because they can no longer afford to maintain their position, e.g.:
  • GME shareholders could lose faith in their investment and sell their shares, which would contribute to downward GME price movement in sufficient quantities
  • GME short sellers could lose faith in their short position, or their ability to continue to hold their short position, and then close it, which would contribute to upward GME price movement in sufficient quantities
• It remains unclear what specific outcome can be expected in either direction, and in what kind of time frame. However, something that is clear is that GameStop is at no risk of bankruptcy for the foreseeable future

For a period of time, approximately 2018 through 2020, GameStop was a struggling company in a weak position, and looked very much like it could be headed towards bankruptcy.

Some hedge funds opened GME short positions because they believed the company’s fundamentals did not justify its stock price and that its value would decline over time.

GameStop was widely seen as a struggling brick-and-mortar retailer in an industry increasingly shifting toward digital sales and subscription-based gaming services. This combined with declining revenue, store closures, and challenges adapting to new gaming trends made it an attractive target for short sellers.

Some hedge funds assessed GameStop’s financials and market position, and concluded that the company was overvalued and that shorting the stock could be a profitable strategy, marking the beginning of this financial conflict.

Of note, for a period of time, GME short interest exceeded 140% of the number of shares in the public float.

Prior to 2021, some keen investors observing GME, such as Keith Gill, saw the opposite view of GME short sellers, that GME was undervalued and over-shorted, and took a counter-position by investing in GME.

A social media phenomenon grew around Keith Gill's view of GME, and eventually hundreds of thousands of retail investors began buying shares of GME, driving the price up.

During this same time period, in late 2020, Ryan Cohen began buying significant amounts of GME shares, contributing to upwards GME price movement. Ryan Cohen later stated in a 2022 interview with GMEdd.com:

Eventually, the relentless buying pressure from enthusiastic retail investors culminated in the GME sneeze, a significant event which drew a large amount of attention towards GME and marked a turning point in the conflict.

As a consequence of competing financial interests, there are competing narratives around GME.

A general narrative put forth by bearish GME short sellers with a vested interest in the share price of GME going down is that GameStop is a dying brick-and-mortar retailer with an outdated business model, and is ultimately destined for bankruptcy.

A general narrative put forth by bullish GME investors with a vested interest in the share price of GME going up is that while GameStop was a dying brick-and-mortar retailer with an outdated business model, it is a company that is undergoing a turnaround and is ultimately destined for greatness.

These two narratives contradict the other; they cannot both be true simultaneously. One side is necessarily more correct than the other, though, due to the nature of this conflict and the ensuing information warfare surrounding it, it is often unclear what the true reality is.

Aside from these basic forms of those narratives, to some degree the story of GME has become about the conflict itself, evolving beyond just the fundamental financial metrics of the company.

GME bears win when their opponents, the bulls, give up on GameStop and capitulate and sell their shares of GME. In such a scenario, shareholders have lost faith in the outlook of the company, sell their shares, and the stock price plummets. As the price goes down, the value of the short position held by GME bears goes up. In the best case scenario for GME bears, GameStop goes bankrupt and the stock gets delisted.

GME bulls win when their opponents, the bears, give up on their GME short position and close out of it. Alternatively, GME bears could be forced to close their position via margin call, which would produce the same outcome. In order for a short position to be closed, the holder of that position must buy shares in order to return them to the party that they originally borrowed them from. In such a scenario, short sellers are buying back shares of GME, causing the price of GME to rise, thus increasing the value held by shareholders.

Using a variety of different measurements or calculations, for example the Altman-Z score, something that is clear is that GameStop is at no risk of bankruptcy for the foreseeable future, ruling this out as a plausible outcome of this conflict.

Furthermore, the book value of GME is currently about $11 per share, as a calculation of: assets minus liabilities, divided by total shares outstanding.

Many retail investors that purchased shares of GME were doing so as a bet against that other faction that was seeking to lower the price of GME; GME investors were directly challenging GME short sellers in the pursuit of profit.

After the events of January 2021, the story of GME entered into a new phase with competing narratives.

On the one hand, there is the prevailing narrative put forth by mainstream financial media and elsewhere, that the events of January 2021 happened, the thing that happened was a short squeeze, the short squeeze ended naturally, and then it was over. Implicit in this narrative, is the notion that shorts closed, that shorts moved on, that there no longer exists high short interest in GME and that therefore any GME investor hoping for a future short squeeze is wasting their time; forget GameStop.

Many GME shareholders do not believe in that narrative, and offer a counter-narrative: shorts never closed, and that in general the mainstream financial media and financial institutions are lying about it.

The implication of this belief that is commonly assumed to be true by many GME shareholders is that there are some market participants, hedge funds or otherwise, that remain on the hook with an underwater GME short position or swap equivalent that must eventually be closed, and when this happens, the outcome will be a real short squeeze, an event commonly referred to by some GME shareholders as MOASS (the mother of all short squeezes).

This belief is an assumption that remains speculative and not proven by hard evidence. Rather, it is supported by a variety of clues and circumstantial evidence.

In general, whether true or false, the idea that shorts never closed continues to be a motivating belief held by many GME shareholders.

From this point of view, a large short position can be considered an unrealized asset that can be gained via capitulation of the short sellers, such as in the case of Ackman versus Icahn.