GameStop’s surprise profit triggers short squeeze, meme stocks rally

By Medha Singh

(Reuters) -Meme stock GameStop Corp (NYSE:) jumped nearly 40% on Wednesday as the video game retailer’s first profitable quarter in two years squeezed bearish investors and ignited a surge in other stocks popular among retail traders.

AMC Entertainment (NYSE:) Holdings Inc gained 3.4%. AMC and GameStop were at the heart of a meme-stock frenzy in 2021 driven by small investors coordinating on social media.

Among other highly shorted meme stocks, Koss Corp climbed 9.5%, Bed Bath & Beyond (NASDAQ:) reversed course to slip 1.3%, while the Roundhill MEME ETF rose 4.2%.

Grapevine, Texas-based GameStop, in which billionaire investor Ryan Cohen holds a majority stake and serves as chairman, recorded a 16% decline in costs during the quarter and surprised Wall Street analysts with a profit.

Investors saw this as an early sign of turnaround for GameStop, whose core business of selling new and pre-owned videogame disks is shrinking as consumers move to downloading games digitally or streaming.

GameStop was the second most traded U.S. stock among retail punters, according to J.P.Morgan.

The stock hit its highest level in more than four months with 45 million shares changing hands by 11:35 a.m. ET, among the top five most traded U.S. stocks.

“Luckily, this go around is not due to meme investors, but an actual tangible fundamental event,” said David Wagner, portfolio manager at Aptus Capital Advisors.

Not everyone was convinced, however.

The share surge “looks to be the result of good cost control rather than top-line growth, which is not ideal”, said AJ Bell Investment Director Russ Mould.

“Crypto, meme stocks, IPOs, SPACs and other, speculative assets all peaked a long time ago and the easy-money frenzy of 2020-21 now looks like an aberration on price charts, not the start of a brave new world.”

SOURING SHORT BETS

When there is a rush of demand from short sellers looking to exit their bearish bets amid a rise in a stock’s price, it pushes prices even higher, resulting in a short squeeze.

Another favorite among retail investors – Carvana Co (NYSE:) – jumped 22% after the used-car retailer said it expects a smaller core loss in the current quarter.

Short sellers betting against GameStop have lost $610 million since the start of the week, analytics firm Ortex estimated, adding that about 24% of GameStop’s publicly available shares were in short position.

Wedbush raised its price target on GameStop’s shares to $6.50 from $5.30 after the results, as the brokerage believes the lower cost structure reduces the risk of ongoing losses.

“We didn’t come because of shorts, we were here because of the brand name,” a retail trader with the username “ApeBeyondTheMoon” wrote on investor-focused forum stocktwits.com.