- GameStop's (NYSE: GME) shares have soared 1784% year-to-date, as countless small retail investors egged on by social networking bought up its shares and call options.
- GameStop's current stock price is irrational as the company is a struggling video game retailer stuck in a legacy business.
- GameStop has also temporarily taken over some ETFs, such as the Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR) as its weighting grew from just 3.7% to some whopping 17.3% in a matter of days.
- Investors who wish to invest in the video gaming space ought to be cautious of GAMR, given its heavy allocation towards the highly volatile GameStop.
- Investors who are seeking contact with the video gaming industry may think about the Global X Video Games & Esports ETF (NASDAQ: HERO), Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSE: NERD) or even the VanEck Vectors Video Gaming and eSports ETF (NASDAQ: ESPO) instead.
What has been going on with GameStop's share price?
It has been a manic month. GameStop began the month of January in a share price of USD 17.25, however the stock kept shooting higher, eventually hitting a higher of USD 347.51 by 27 January 2021 (Figure 1).
Figure 1: GameStop's share price has risen immensely
The frenzy hit new heights on Thursday (28 January 2021) when several trading platforms limited their clients from buying shares of GameStop. GameStop eventually gave back a chunk of its gains and finished the day at USD 193.60, down 44%. But as of 29 January 2021, the proportion price is still up 1784% year-to-date.
However, it's not GameStop precipitous rise which has the world fascinated. Instead, it's what's propelling an upswing. As a result of Gamestop's failing business, it was one of the most shorted stocks by institutional investors, an undeniable fact that was picked up by a number of retail investors on social networking platforms such as the now infamous Wallstreetbets (which presently has over 7 million subscribers) on Reddit.
These users came up with the idea to convince enough people to buy up GameStop stock, inside a conscious collective effort they are driving the share price up. The move was meant to trigger a short squeeze and cause hedge fund managers to incur heavy losses.
Why the present share price is irrational?
There is no denying that GameStop is a struggling retailer. The organization is a mid-size retailer stuck in a legacy business of selling physical game titles at its brick-and-mortar stores, at a time when consumers are increasing moving towards buying game titles online. With GameStop's business being disrupted, it is not surprising that the company has been closing stores and making losses.
As such, GameStop's current stock price is irrational. The company is just unable to generate enough earnings to justify its more than USD 20 billion market cap, and there's absolutely no good reason why a long-term investor should buy this stock.
The share price rally is solely speculative in nature, and is largely disconnected from the fundamentals of the company. At some point, people are going to realise that the fair worth of GameStop is actually much lower than its current price, and this could potentially lead to a collapse in share price – much like what happened during the dot-com bubble.
How GameStop has hijacked ETFs
When a situation like this occurs, it naturally has an impact on the wider market. As a matter of fact, GameStop has taken over some ETFs that hold it. One of the most heavily affected is that of Wedbush ETFMG Video Game Tech ETF (NYSE:GAMR), the only real video-game ETF in the market with contact with GameStop.
GAMR seeks to track the performance from the EEFund Video Game Tech Index. The index is made to reflect the performance of companies involved in the video game technology industry, including game developers, console and chip manufacturers and game retailers.
As of now, GameStop is the GAMR's top holding (Table 1). The business's weighting in GAMR grew to a whopping 17.3% from just 3.7% last week. The weightings are based on GameStop’s closing price of USD 325 on 29 January 2021.
Table 1: Top ten fund holdings of GAMR
|Top 10 fund holdings||Weightage|
|1) GameStop Corporation||17.26%|
|2) Bilibili Inc||2.74%|
|3) Pearl Abyss Corporation||1.88%|
|4) IGG Inc||1.85%|
|5) Codemasters Group Holdings||1.73%|
|6) Keywords Studios PLC||1.73%|
|7) Capcom Co Ltd||1.71%|
|8) Embracer Group AB||1.69%|
|9) Zynga Inc||1.68%|
|10) Activation Blizzard||1.65%|
Data as of 29 January 2021
For the time being, Gamestop will continue to have an outsized weighting in GAMR at least until interest in its shares dies down or the fund rebalances. GAMR rebalances on a quarterly basis, and will be due for a rebalancing in March.
What should investors do?
For now, investors who would like to invest in the video gaming industry should be cautious of GAMR. Unlike other video gaming ETFs available in the market, it has heavy exposure to GameStop and a massive reversion in stock price may be on the horizon.
Investors who are seeking contact with the video gaming industry should consider the following ETFs instead. The top picks based on our ETF selection methodology is that of: The Global X Video Games & Esports ETF (NASDAQ: HERO), followed by Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSE: NERD) and VanEck Vectors Gambling and eSports ETF (NASDAQ: ESPO).
All in all, it is difficult to prevent people from pushing a regular too high and potentially burning themselves along the way. With this in mind, investors should look to other ETFs without any exposure to GameStop to minimise their risk.
For specific disclosure, during the time of publication of this report, IFPL (via its connected and associated entities) and also the analyst who produced this report hold a NIL position in any of the abovementioned securities.