This led to a liquidity gap that simply could not be covered, and for a brief moment VW became the most valuable company in the world at $370 billion. Shorts desperately tried to exit their position to no avail, leading to the mother of all short squeezes. Ultimately, less than 6% of the voting stock float remained outstanding, and at the time 12% of shares were shorted. In 2008, Porsche attempted to acquire Volkswagen through the discrete accumulation of cash settled derivatives. There aren't many precedents for this specific situation, and the best case study I could find was Volkswagen in 2008. In order to accomplish this, I'm going to go beyond my value-investing comfort zone into the land of derivatives - specifically deep out-of-the money call options.Ī short squeeze on a low-volume, 99% shorted stock will (in my option) lead to a major outlier event. I'm here to make a >50x return on a short-squeeze. The crux of this article isn't to prove long-term value however. Effectively, if they can prove out any future viability, they should be worth roughly 5x their current share price. Finally, assuming terminal value, I can back into $20 to $30/share. Assuming they successfully sell LT assets, I can get to $10/share. This excludes any terminal value or additional cash flow from the sale of the corporate jet / sale leaseback. They also hold a unique position within the thriving video game industry, and I believe they could be a genuine buyout target for a larger digital retailer looking for brick and mortar exposure.īased on the upcoming console cycle alone - I can back into a $7/share valuation. They have the ability to buyback shares, and they don't pay a dividend allowing them to reinvest in the business. They can expand high margin digital sales, close less profitable stores (reducing LT debt from leases), and paydown debt with excess cash on hand.
#VW SQUEEZE FREE#
The company has made improvements in its vendor relationships, and is poised to generate meaningful free cash flow during the upcoming console cycle. Gamestop executed its debt exchange flawlessly. However, I would argue shorts lack the imagination to envision how this company might not only survive, but thrive. Of course, Gamestop very well could go to zero sometime in the future. The interest cost to hold a short position, the cost of hedging, and the length of time it will take Gamestop to go to zero mitigate the appeal of shorting Gamestop from $5/share to zero. However, I argue there is no incentive to remain short at this point. They have made numerous managerial missteps and their struggling business is under even more pressure from COVID-19. Short-sellers have become emboldened by 5-years of consistent returns and dramatically underestimate this businesses' will to survive. Gamestop is a case study in negative bias. This decline is shown perfectly in their historical share price. Rapid leadership changeover, bad management, poorly though-out acquisitions, a lack of innovation, and a distended-console cycle led to a slow degradation of the business. Subsequently, a comparison to Blockbuster entered the public lexicon. Secular tailwinds favored a transition to digital retail, and Gamestop was slow to move. Gamestop's business woes intensified in 2016. Unfortunately there success led to complacency and extremely poor decision making. in 2005, Gamestop acquired EB Games and solidified its position as a leader in a niche retail space. Gamestop flourished as an appendage of the rapidly growing video game industry. FunCo changed its name to Gamestop, and in February 2002 Gamestop went public on the NYSE under the ticker GME. Barnes & Noble subsequently acquired GameInformer and rolled both entities into its subsidiary FunCo. Over time, Babbages steadily grew into a respectable retailer and was ultimately acquired by Barnes & Noble Bookseller in October 1999 for $215 million.
#VW SQUEEZE SOFTWARE#
GameStop traces its roots to Babbage's, a Dallas, Texas-based software retailer founded in 1984.
#VW SQUEEZE HOW TO#
Without further ado: How to Profit from a Short Squeeze A Brief History of Gamestop ( NYSE: GME) Also, if you find any mistakes - I love feedback and won't be hurt by constructive criticism.
The assumptions I'm going to make are purely theoretical and reflect an extremely bullish bias. Feel free to skip the more technical sections. Instead, I want to focus in depth on the anatomy of a short squeeze, and how one might profit from one.įorewarning, I love math and portions of this article will be mathematically dense. If you care to learn more about why Gamestop is undervalued, I would highly recommend reading these articles from my fellow Seeking Alpha authors: Article 1, Article 2, Article 3. This is not your typical Seeking Alpha article.
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