The stock tumbled to $75 at 10:49 am in New York, meaning it has now given up nearly 85% of the spectacular gains that were fueled by last month’s attack on short sellers. The video-game retailer’s market value has dwindled by more than $28 billion to $5.8 billion from a Thursday intraday peak, though the stock is still up more than 300% year-to-date.
GameStop’s retreat has coincided with a sharp reduction in short interest after bearish investors appeared to cover their positions. That has loosened a squeeze on the stock caused by day traders who used Reddit forums to tout and bid up out-of-favour stocks that also included movie-theater chain AMC Entertainment Holdings Inc. and American Airlines Group Inc.
“It looks like the unwind of the short squeeze, where prices will start to reflect economic reality again,” said Maarten Geerdink, head of European equities at NN Investment Partners.
Other stocks recently favoured by the Reddit community are also rapidly losing steam: AMC tumbled 53% and at $6.19 is two-thirds lower than last week’s intraday high. Express Inc. declined 43% and has lost about 80% of its value since peaking on Wednesday.
The declines come as short sellers reduce their interest, having sustained multi-billion dollar losses. The short interest in GameStop shares has tumbled to 36% of its freefloat, according to data from IHS Markit.
Tuesday’s drop came despite a loosening of restrictions on the amount of shares investors can buy using Robinhood Markets Inc. On Monday afternoon, the popular trading app started allowing users to purchase up to 20 shares of GameStop, up from a cap of one before the market opened.
The lower number of shares sold short could also deal a blow to day traders’ thesis that a higher stock price would only result in more gains as hedge funds who bet against the Grapevine, Texas-based company would need to cover their shorts.
Tuesday’s capitulation spread to cult-like figures including Barstool Sports founder Dave Portnoy who has taken to social media to promote his trades since the onset of the Covid-19 pandemic. Portnoy tweeted that he had “officially sold all my meme stocks. I lost 700k ish.”
Backlash against short-sellers including Citron Research had been a key rallying point for retail traders using Reddit to communicate about their bets. The mania spread to companies like AMC Entertainment, which saw record volatility as trading volumes soared last week.
“The markets can be very irrational in the short term, but at some point we do believe that in the medium to long term, the market gets back to trading closer to the fundamentals,” Samy Chaar, chief economist at Banque Lombard Odier & Cie SA, said. “If these stocks are in the end not companies that will generate a visible quality trend of profits, then investors that want to buy them at some point will shrink.