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

By Medha Singh

(Reuters) -Meme stock GameStop Corp surged nearly 41% on Wednesday as the video game retailer's first profitable quarter in two years squeezed bearish investors and sparked off a rally in other stocks popular among retail traders.

GameStop, AMC Entertainment Holdings Inc and several other names were at the heart of a meme-stock frenzy in 2021, which was driven by small investors coordinating on social media. A number of those names were up on Wednesday.

However, not everyone was convinced that the surge would kick off another round of extended gains.

"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," said AJ Bell Investment Director Russ Mould.

Grapevine, Texas-based GameStop surprised Wall Street analysts on Tuesday evening by reporting strong profits in the fourth quarter, thanks to a 16% drop in costs.

Investors took this as an early sign of a 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.

"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, who does not have a position in the stock.

GameStop was the second most traded U.S. stock among retail traders, according to J.P. Morgan. The stock hit its highest level in more than four months with 54 million shares changing hands by 1:32 p.m. ET, among the top five most traded U.S. stocks.

Still, Mould said the share surge "looks to be the result of good cost control rather than top-line growth, which is not ideal".

Another favorite among retail investors - Carvana Co - rose 11% after the used-car retailer said it expects a smaller core loss in the current quarter.

Among other highly shorted meme stocks, AMC shares were up 2.7%, Koss Corp climbed 6.8%, and the Roundhill MEME ETF rose 0.5%.

SOURING SHORT BETS

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

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 said 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.

(Reporting by Medha Singh in Bengaluru; Editing by Maju Samuel, Saumyadeb Chakrabarty and Arun Koyyur)

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