Why Has GameStop (NYSE: GME) Popped 75% This Month?

Having watched their shares fall 90% in the six years prior to 2020, and then watching them slip under the $3 mark in April, investors in GameStop (NYSE: GME) must have surely been expecting to see their stock trade at $0.20 before it traded at $20 again.

But the stock market works in mysterious ways and having leveled off throughout the summer, shares of the Texas-based video game retailer have logged a blistering run over the past four months. A 4% jump in Monday’s session had them closing up more than 400% since August and 75% in the past two weeks alone. That’s a phenomenal amount of momentum to take with them into 2021 and there’s plenty of steam left in the engine.

Change Of Direction

Things were already starting to heat up in September before news broke in October of a surprise commercial agreement with Microsoft (NASDAQ: MSFT). Any time a gamer buys digital-only products on an Xbox that was purchased in a GameStop store, GameStop will get a cut. This kind of partnership bodes well for the company’s efforts to drive their digital revenue as they continue to pivot towards that channel.

At the time, short interest in GameStop shares was upwards of 100% so this news unsurprisingly lit a fire under the stock as the shorts rushed to buy shares to exit their positions. But unlike other short squeezes, the run didn’t stop there. Richard Mashaal's Senvest Management announced the same month that they’d picked up a 5.5% stake in the company and highlighted the long term recovery potential they saw and this only served to add fuel to the fire.

Then, earlier this month, Wedbush was out with a 100% increase to their price target for GameStop shares. Analyst Michael Pachter noted at the time that GameStop is "well-positioned to be a primary beneficiary of the new console launches," and should "return to profitability relatively soon." Around the same time, Telsey Advisory Group also came out bullish on the stock, saying that the worst was behind them and there were far more pros than cons to the bull thesis now.

The company’s Q3 earnings report came in a little light on revenue shortly afterward, which knocked shares down by nearly 30%. However, this blip was short-lived as investors happily snapped up more and started a fresh run in the stock which has continued into this week. The key driver here seems to be the success the company is seeing in their aforementioned digital channel. Even though EPS was still deep in the red, revenue was down 30% on the year, and comparable-store sales contracted more than expected, e-commerce sales popped a staggering 257% to show there’s life in the old dog yet.

Looking Good For 2021

Last week, it emerged that RC Ventures had increased their stake in GameStop and were planning to “remain in activist mode” while Hedgeye added GameStop to their Best Ideas for 2021 list. Analyst Brian McGough noted “if the company can execute a turnaround strategy to make GameStop the leading store and online destination for the gaming community, you could have a stock at $50+."

This kind of optimism is sure to make any remaining shorts even more nervous than they already are. The stock has jumped to multi-year highs on the back of a recovery story that’s doing nothing but gaining momentum. April’s $2.57 print seems a long time ago now, will the same be said for today’s $21 print in a few month’s time?