GameStop inventory skyrockets as short sellers

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Short sellers of

GameStop

the stock has just been squeezed. The video game retailer’s shares rose almost 94% on Wednesday, although the gain has shrunk to about 57% with the market closing.

In an email to Barron’s, Ihor Dusaniwsky of S3 Partners pointed to optimism after news on Monday that Chewy co-founder Ryan Cohen and two other former Chewy executives were joining GameStop’s board of directors (ticker: GME). This, combined with year-end sales results, seemed to trigger “a long shopping tsunami,” according to Dusaniwsky

Barron’s recently noted, citing short selling data from S3 Partners, that the stock appeared to be prepared for a short squeeze, when demand for a stock rises briefly as investors rush to cover bets that the price will fall. Investors have been betting against GameStop shares, given industry trends such as the growth of free online games. The growing trend of consumers to buy games online, instead of buying copies in stores, has left the company’s physical disk business in a difficult situation.

With increasing competition from e-commerce sites and larger retailers, such as

Walmart

(WMT),

Best buy

(BBY) and

Target

(TGT), a bold new strategy will probably be needed for GameStop to change things. Investors, for now, seem to be betting that Cohen and the company might find one.

As of Wednesday’s close, more than 143.5 million GameStop shares were traded – almost double the previous record volume of 77.15 million shares on October 9, according to Dow Jones Market Data. The stock closed 57% higher at $ 31.40, which was the biggest close since August 2016.

Short sales fell $ 812 million in mark-to-market losses on the day, according to S3’s Dusaniwsky.

“Although I agree that we are seeing some short positions out of their positions due to massive mark-to-market losses today, this is very similar to the chicken and egg issue,” wrote Dusaniwsky, adding that he believes the long purchase led to short coverage, instead of the other way around.

Dusaniwsky does not expect a big drop in short shares in the next few days, noting that short sellers lost $ 968 million in mark-to-market losses in 2020. Instead of going out, short sellers actually increased their positions.

Ronnie Moas of Standpoint Research downgraded shares to Hold de Buy after the move. Moas noted that he recommended the name on December 29, 2016, when the stock was trading around $ 25.

“I can no longer leave my highest recommendation associated with this name, due to the recent absolute and relative movement,” he wrote on Wednesday.

GameStop’s shares had their fair share of one-day bursts. An agreement with

Microsoft

triggered a 44% rise on October 8, but analysts noted that it looked like a mundane ad for cloud-based infrastructure. Even with some share in the profits from GameStop sales of Microsoft’s Xbox Game Pass Ultimate, that didn’t seem to mess with the pointer.

“Profit sharing helps, but it may not be incremental versus sales / lost profits from switching to digital. And, more digital also means less used [games], the biggest driver of profit and loyalty [for GameStop]”, Credit Suisse analyst Seth Sigman wrote at the time.

Write to Connor Smith at [email protected]