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Why GameStop Stock Just Popped 21%

What happened

Yesterday was supposed to be a bad day for mall-based videogame retailer GameStop (NYSE: GME). In a post on Twitter, short-seller Citron Research had threatened to post a livestream video laying out the "5 reasons GameStop [buyers] are the suckers at this poker game" and why GameStop stock would go "back to $20 fast."

The video didn't arrive as promised, though, and GameStop didn't go back at all. Instead, it went up 10%, and it's going up another 21% today, as of noon EST.

Image source: Getty Images.

So what

Why is this happening? Some believe that GameStop short-sellers are suffering a short squeeze -- and that's probably true. It's also true, though, that Citron failed to publish its livestream when promised, blaming "people hacking Citron twitter" for the delay yesterday.

Too many people hacking Citron twitter, will record and post later today.

going to $20 buy at your own risk

— Citron Research (@CitronResearch)

The video did eventually come out, but it wasn't live. In it, Citron head Andrew Left laid out his five reasons for selling GameStop, which basically run like this:

  1. Although there is a high short interest in GameStop stock, "there is no short squeeze happening" because there are still plenty of GameStop shares available to borrow and short.
  2. Hardware sales grew 23% year over year in December, but GameStop's sales declined 9%, so it is losing market share to Best Buy, Walmart, and Amazon.
  3. GameStop sells for 40 times next year's EBITDA, which is really expensive.
  4. A Twitter mob is driving the stock price up, resulting in that high valuation.
  5. GameStop has more than $1 billion in debt and will probably sell stock to reduce its debt, diluting anyone who has bought into GameStop.

Now what

I agree with most of those arguments -- aside from the one about there being no short squeeze. Anyone who has sold this stock short, and who bets that it will go down, is probably at least a little nervous seeing it get more expensive.

As a reminder: When you sell a stock short, and it goes to $0, you make a profit of 100%. When you sell a stock short but it goes higher, your losses are potentially infinite. Ultimately, Citron believes that GameStop is a "failing mall-based retailer" -- but it is GameStop short-sellers who are failing today.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends GameStop and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.


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