Believe it or not, there are real-world financials to consider.
State of play
In all the recent market mania, it might be easy to forget that there’s an actual company at the center of the frenzy. Here’s a quick look at the real-world prospects for GameStop, which begins the week with a market cap of more than $20 billion, up from $1 billion at the start of the year.
Running the numbers. GameStop’s annual sales peaked at nearly $10 billion before falling to $6.5 billion in its most recent pre-pandemic fiscal year. It has recorded a loss in eight of its past 10 quarters.
The biggest challenge. Gamers can now easily download their games directly instead of going to a store. That means GameStop needs to find a use for the more than 5,000 stores it operates. It could downsize, and it’s been trying, but this is expensive and difficult; unwanted retail properties are flooding the market. And shrinking to grow has not proven a path to retail greatness. In truth, few specialty retailers have turned their business around in the face of technological disruption. (Best Buy is an exception.)
The biggest opportunity. Analysts point to recent strength in GameStop’s digital business over the holidays, and an upcoming refresh cycle for gaming consoles, as cause for optimism. Even so, it’s hard to justify its sky-high valuation: Its price-to-sales ratio is nearly the same as Amazon’s. Analysts’ average price target for the stock is just over $13 per share; in premarket trading today, the stock is at $300.
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“There’s no reason that stock should be where it is,” Bruce Cohen, co-founder of the retail advisory firm CH Consulting, told DealBook. “That is just a stock manipulation exercise.”
Why it matters. When investors get valuations wrong, “capital goes to less productive companies at the expense of companies that would have used it better,” said Eric Gordon, a professor at the University of Michigan’s Ross School of Business. This notion has not necessarily been tested by GameStop yet, which would have to raise funds at its current valuation, as other companies have done during the past year’s market rises.
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The “biggest risk,” according to Lynn Turner, a former chief accountant of the S.E.C., is that people stop putting money in the markets “because they think it’s turned from investing into betting at a craps table.”
HERE’S WHAT’S HAPPENING
Is silver next? Crowds of retail traders have seemingly turned their focus to the precious metal, whose price jumped to an 11-year high. For some, it brings to mind the Hunt Brothers’ attempt to corner the silver market decades ago.
Exxon Mobil and Chevron may be open to a merger. The chiefs of the two oil giants reportedly spoke last year about combining forces, according to The Wall Street Journal. That would be among the biggest mergers ever, demonstrating the pressure the industry is under as economies shift from fossil fuels.
Dogecoin is on a roller coaster. The cryptocurrency, which began as a joke, lost a third of its value over the weekend after more than doubling in price on both Thursday and Friday thanks to inspiration from — who else? — Elon Musk. It is up around 40 percent so far today. (Speaking of crypto, DealBook took a close look at how digital currencies might be regulated under the Biden administration.)
President Biden reaches out to Republican senators over their stimulus plan. The White House invited 10 senators to discuss their $600 billion proposal. That’s a fraction of the size of Mr. Biden’s own $1.9 trillion plan, so compromise won’t be easy.
Wall Street chiefs push employees to vote in New York City’s mayoral race. Leaders at General Atlantic, Goldman Sachs and Neuberger Berman have exhorted their staff to register to vote in the city’s Democratic primary. The calls show the industry’s eagerness to boost pro-business candidates in a race full of progressives.
A ‘surreal’ time for Robinhood
Heading into the weekend, Robinhood faced pressure on its business model, rumor-mongering about its allegiance to hedge funds and saber-rattling from Washington. None of those challenges has gone away.
“This has been a very surreal weekend and week for me,” Vlad Tenev, Robinhood’s C.E.O., said in an interview with Elon Musk (!) on the social network Clubhouse overnight.
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He revealed that early last Thursday, an arm of the Depository Trust and Clearing Corporation, Wall Street’s main clearinghouse for stock trades, had demanded $3 billion in additional collateral — “an order of magnitude” more than usual — to cover risky trades by its customers. That was later reduced to about $700 million, but Robinhood was still forced to draw down credit lines and raise $1 billion from investors.
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After Mr. Tenev said that Robinhood had imposed trading curbs to lessen its collateral requirements, Mr. Musk asked whether the company was “beholden” to Citadel Securities, the huge financial firm that executes most of its trades. Mr. Tenev shot back, “That’s just false.” When Mr. Musk asked whether “something really shady” was behind the collateral demand, Mr. Tenev said, “You’re getting into conspiracy theories a little bit.”
Robinhood is increasingly in Washington’s sights. The Times’s Deborah Solomon notes that Gary Gensler, President Biden’s pick to run the S.E.C., may have to consider new rules for online brokerages and their market makers.
Robinhood’s customers still have reason to be angry. The brokerage will continue to restrict trading in shares and options of GameStop and seven other companies.
In other meme-stock news: Silver Lake sold its holdings in AMC Entertainment. The hedge fund Melvin Capital lost 53 percent last month after its bet against GameStop got squeezed. Steve Cohen deleted his Twitter account after what he said were threats against his family. GameStop’s trading winners probably owe lots of tax. And a movie about the frenzy is already in the works.
Seen and heard
“Mean reversion bias: The belief that once we put 2020 behind us 2021 would be back to normal.”— Dan Loeb, founder of Third Point, on Twitter
“This week demonstrated that unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil.”— Goldman Sachs analysts, in a research note
“We’re seeing a level of misunderstanding about how markets work that is being brought on by a whole new generation of investors who have never seen a bear market.”— Jim Chanos, founder of Kynikos Associates, to The Financial Times
“What GameStop shows right now is the Wall Street game is rigged and it’s been rigged for years now. Hedge funds have been taking advantage of it. Giant corporations have been taking advantage. And individual investors over and over catch the short end of the stick.”— Senator Elizabeth Warren, on MSNBC
“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen?”— James Angel, professor at Georgetown’s McDonough School of Business, to The Times
The week ahead
Earnings season picks up pace, with more than a fifth of S&P 500 companies reporting this week. They will hope to keep up a streak of better-than-expected results: More than 80 percent of firms have beat fourth-quarter profit forecasts thus far, according to FactSet.
Among the notable reports are Alphabet, Amazon, BP, Exxon and Pfizer on Tuesday; Apollo and Qualcomm on Wednesday; and Deutsche Bank, Ford, Shell and SoftBank on Thursday.
Kuaishou, a hugely popular video-sharing app in China, is set to raise more than $5 billion in a Hong Kong listing on Friday, the largest I.P.O. in over a year.
The U.S. jobs report on Friday is expected to show a gain of 50,000 jobs in January, only partially reversing the loss of 140,000 positions in December.
‘That is how the game is played’
At the center of the meme-stocks frenzy is Reddit, whose WallStreetBets forum was the birthplace of the trade that pushed shares in GameStop to dizzying heights. The message board operator’s C.E.O., Steve Huffman, joined Kara Swisher for the Times Opinion podcast “Sway,” and had a lot to say about his company’s role in the melt-up. Two of his main points:
There’s not much Reddit can do. When pushed on the company’s responsibility to protect users from the market frenzy, Mr. Huffman compared trading to other dangerous activities. “I would be worried if people were jumping off a cliff into a river as well,” he told Kara.
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Users are simply voicing opinions, according to Mr. Huffman, and that’s legal: “I’m not even sure what gates we would put in place.”
Reddit is no different from the media. When asked about how his company’s forums could be used to spread disinformation, Mr. Huffman said his company was acting just like established financial media outlets:
I would make the exact same criticism of CNBC, of any financial newsletter. That is how the game is played. People have their theories. They have their desires. They have stocks that they’re pushing. They go on TV. They go on newsletters. They write newsletters. They go on forums.
THE SPEED READ
Deals
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Shares in companies affiliated with HNA, the once-highflying Chinese conglomerate, slumped as creditors sought to push their parent into bankruptcy. (Reuters)
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Last month set a record for I.P.O. offerings, thanks to SPACs. The C.E.O. of the London Stock Exchange said that making the city more attractive to blank-check funds could help it maintain its hub status after Brexit. (Bloomberg, Reuters)
Politics and policy
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The Paycheck Protection Program has been revived, but researchers say the lending program saved relatively few jobs. (NYT)
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The Jan. 6 rally in Washington that preceded the Capitol riot was funded largely by the heiress to the Publix supermarket chain, a top donor to the Trump campaign. (WSJ)
Tech
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Inside the demise of Mt. Gox, once a huge Bitcoin exchange. (Bloomberg)
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Winners of a federal auction for 5G spectrum, which attracted $81 billion worth of bids, are expected to be announced soon. (CNBC)
Best of the rest
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The shocking tale of one man’s hunt for the person destroying his and his family’s reputations — and many, many others — online. (NYT)
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“How Women Are Changing the Philanthropy Game” (NYT)
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Forget the Ivy League: The C.I.A. is trawling Twitter and LinkedIn to recruit millennial and Gen Z agents. (WSJ)
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