Here's why GameStop stock skyrocketed more than 100% on Wednesday — and why it could be on the verge of collapse

Investors are playing a dangerous game that could end in crushing losses.

| More on:
asx growth shares represented by risk meter with needle pointing to high

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of GameStop Corp (NYSE: GME) extended their torrid recent gains on Wednesday as a horde of traders rushed to buy the video game company's stock in attempt to crush short-sellers and drive its price to astronomical levels.

As of 1:25 p.m. EST, GameStop's stock price was up a shocking 125%.

Yet the stock's incredible rally could be nearing its end.

So what

GameStop's shares are now up nearly 1,700% so far in 2021 -- and it's still January. An epic short squeeze is believed to be fueling the rally -- one led by an army of individual traders that are using social media sites like Reddit and Twitter to coordinate their strikes against short-sellers.

By buying heavily shorted stocks en masse, these bear slayers are driving up their price. Short-sellers, in turn, are suffering staggering losses.

To stem the bleeding, many short-sellers -- including multibillion-dollar hedge fund Melvin Capital -- have been forced to exit their positions. This requires that they buy back the stock they sold short, which has likely helped to drive GameStop's price even higher.

The short squeeze has even caught the attention of Tesla CEO Elon Musk and venture capitalist Chamath Palihapitiya. On Tuesday, Musk sent his 43 million Twitter followers a link to a popular Reddit message board that many traders have used to hype GameStop's stock. Palihapitiya, meanwhile, went so far as to say on Twitter that he bought GameStop call options, which is essentially a leveraged bet that its stock price would continue to rise.

Now what

While no doubt amusing to Musk, Palihapitiya, and the legion of GameStop bulls who have enjoyed the stock's incredible ascent, the steep rally in its share price might not last much longer.

On Wednesday, Bank of America analyst Curtis Nagle reiterated his underperform rating on GameStop's shares. He expects GameStop's upcoming earnings report to remind investors of the company's formidable challenges, including the shift to digital game downloads and the enormous pressure this will place on its preowned and collectibles businesses. Thus, Nagle argues that the game retailer's share price could plunge as much as 97% to $10.

With so much potential downside, those who have profited from GameStop's ascent may want to consider taking profits. And investors who haven't yet purchased shares will likely be best served by staying well clear of GameStop's stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla and Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A man looking at his laptop and thinking.
International Stock News

Why Alphabet stock was sliding today

Let's take a look.

Read more »

A man looking at his laptop and thinking.
International Stock News

Nvidia's stock was down despite its amazing earnings. Here's what history says is coming next

Although it might seem to defy logic, it's not an uncommon phenomenon.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Nvidia share price slips despite 94% revenue growth

Q3 earnings beat expectations, but what about guidance?

Read more »

high, climbing, record high
International Stock News

Could the S&P 500 Index hit 6,500 by the end of 2025?

Could the index climb higher?

Read more »

a small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb.
International Stock News

Is it too late to buy Nvidia shares?

Is Nvidia stock a buy ahead of its third-quarter earnings report tomorrow?

Read more »

a group of people stand examining a large glowing cystral ball held in the hands of one of the group members while the others regard it with various expressions of wonder, curiousity and scepticism.
International Stock News

Here's what to expect from Nvidia on November 20

Can Nvidia score another win?

Read more »

Two people lazing in deck chairs on a beautiful sandy beach through their hands up in the air.
International Stock News

2 no-brainer Warren Buffett stocks to buy right now

While replicating Buffett's success isn't possible, there are a handful of his investments that are no-brainer buys.

Read more »

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

3 reasons to buy Nvidia stock before November 20

This week marks a big moment for tech investors as perhaps the most anticipated earnings of the year will be…

Read more »