AI Can’t Be Fooled By GameStop’s Pivot To NFTs And Blockchain

Key Takeaways

• Gamestop was the original meme stock, whose price went from under $20 to almost $500 in less than three weeks.

• The company has been struggling for profitability, and is now looking to pivot to a digital first strategy, built on blockchain and web 3.0 gaming and an NFT marketplace.

• So far it’s not working so well, and GME is one of our AI’s top shorts for this month.

It’s been over 18 months since the original Gamestop frenzy and the start of the meme stock craze. Despite the fact that the level of hype has died down since the peak, Gamestop is still hitting the headlines on the regular.

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Die hard’s on the WallStreetBets Reddit forum remain convinced that the end game hasn’t yet arrived for GME, and that those with ‘diamond hands’ who continue to hold are going to eventually see a big pay off.

Many on Wall Street disagree, with the fundamentals of the company remaining a major question mark for investors.

Our AI analyzes thousands of data points to come up with long and short positions for stocks in our Investment Kits, and currently Gamestop is one of our top shorts for the month. The nature of the algorithm means this position can’t be pinpointed to a single reason, but let’s take a look at the current state of play for Gamestop to see where the company finds themselves post-meme.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.

The original short squeeze

You’ve no doubt heard about Gamestop and the meme stock madness already, but unless you were deep into Reddit in early 2021, you might not be fully up on the details.

It all came about after some posters on the WallStreetBets subreddit found a high level of short interest in Gamestop stock. A short is when a position is taken that essentially places a bet on the fact that a stock price will go down.

In order to make this trade work, short sellers borrow a security and then sell it on the open market, on the expectation that they’ll be able to buy it back cheaper when their loan comes due.

So for example, say a stock is at $100 and a short seller think’s the price is going to drop to $50. First, they’ll borrow the stock from someone else and sell it at the current market price of $100.

Then they wait until the price falls to their target price, buy it back on the open market for, say, $50, and then give that stock back to the investor they borrowed it off originally.

In this case it means they’ve profited $50 per share. Of course, they could get the call wrong, and this is a very high risk strategy. In theory, the potential losses on a short trade like this are unlimited.

The stock in question might not fall, and it might actually go up. If the stock were to go up to $150, the short seller would be forced to buy it on the open market anyway for a loss of $50 per share, in order to give it back to their lender.

A short squeeze can occur when there is a high level of short positions relative to the amount of stock available for sale. Say that there are 1 million shares available on the open market for sale, and short sellers currently have 1.1 million open positions. This means that there are less shares available than there are positions that need to be closed.

This can cause a huge amount of competition in a short space of time, which can artificially send the stock price skyrocketing.

The Gamestop stock price was a beneficiary of this situation, including an unprecedented level of buying pressure from retail investors. It saw the stock increase from below $20 on January 11, 2021 to reach a closing price of $347.51 on January 27, 2021 and an intraday price of $483.

Many hedge funds who had shorted Gamestop suffered significant losses as a result of the short squeeze. Melvin Capital was the major loser from the situation and were forced to wind down their fund after suffering losses of $6.8 billion, representing 53% of their total portfolio.

Since the heady days of January 2021, GME has come back down to Earth, but it’s still higher than it was prior to the short squeeze. The publicity has also provided a platform for the company to attempt to reinvent itself, after years of slow decline.

Gamestop’s post meme stock moves

So far, it’s an attempt that doesn’t appear to be working. A large component of the optimism surrounding Gamestop in early 2021 included Ryan Cohen, the founder of online pet supply company Chewy, disclosing a large position in GME and coming on as chairman.

His role was to be in charge of a committee tasked with transforming the business away from the traditional bricks and mortar retail business, which was hemorrhaging cash even before the global lockdowns.

The long term aim for the company is to become the ‘Amazon of gaming’ and one of the first major steps they’ve taken since the short squeeze has been to launch their own non-fungible token (NFT) marketplace.

Launching any new cryptocurrency project in the current climate was always going to be a tall order, and so far it hasn’t been going according to plan. Overall volume for NFTs and crypto trading is down massively so far this year, with even established players like Coinbase struggling to maintain revenues.

Daily revenue from the Gamestop NFT marketplace has been as low as $4,000, which is hardly going to be the turnaround story that Gamestop are looking for.

They also implemented a stock split back in late-July 2022, likely in an attempt to get away from the price anchoring related to the meme stock boom and with the hope to maintain a higher market cap as a result.

Over recent months the stock has sporadically gone through cycles of dramatic price action, as investors get excited about the potential for ‘meme stock 2.0’. So far, these price rises have failed to have staying power, though the stock is still up over 20% from six months ago.

The future for Gamestop

Regardless of how much hype is generated around the ticker symbol, Gamestop needs to make some major moves to turn the company around.

They lost $400 million in the 12 months to the end of April, and with just over $1 billion in cash on hand, they only have so much runway until something has to give.

That’s not to say they aren’t working on it. Chairman Ryan Cohen is going hard on attempts to make Gamestop more tech focused, with a large number of key tech hires and a notable level of attention being given to blockchain and web 3.0 gaming.

What this means for investors

Investing in Gamestop is a high risk proposition, and from a fundamental standpoint there are some significant headwinds on the horizon for the company.

Our proprietary AI looks at a massive number of data points including fundamental data such as earnings quality, technical momentum factors and trends and sentiment analysis from sources like Reddit and Youtube comments.

All of this data is combined to provide an overall long or short recommendation across our Investment Kits, and right now Gamestop is one of our AI’s top shorts for this month.

So while the executives of the company might be capable of telling a good story, AI can’t be fooled by a slick presentation.

The short squeeze party might potentially be over for GME, but that doesn’t mean there aren’t other options. We’ve created an AI-powered Short Squeeze Investment Kit which specifically seeks out and targets other short squeeze opportunities, based on historical data and technical markers.

We use AI to identify stocks that have the potential to break out due to a short squeeze, and rebalance the positions every week to take advantage of the most up-to-date information.

If you prefer a more traditional investment strategy in companies that are already deep in the tech industry, our Emerging Tech Kit looks to invest in a range of tech verticals including ETFs, large cap and small cap tech stocks and cryptocurrencies.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.