GameStop (NYSE:GME), a Fortune 500 company, is a retailer of games and entertainment products. In 2020, it looked like GameStop was on the verge of bankruptcy. And yet, this year, its share price skyrocketed. The GameStop share price traded at a mere price of $19 per share in early 2021. Today, it’s now closer to $210. That’s a 1,000% increase within six months!

The stock frenzy

The GameStop share price started to rise on January 13^th. By January 26^th, the stock price of the video game retailer rose up to $145.6. Shockingly, the next day the stock opened at $345. A 137% increase in a single night. The GameStop share price continued its bullish journey and touched $469 on 28^th January. Then in the space of a week or so, it crashed back down to $50. Seeing volatility on this scale is quite rare and definitely something I like to investigate. So what happened?

A group of retail investors, known by the title of ‘wallstreetbets’, used the internet platform Reddit to artificially raise the stock price by purchasing high volumes of shares. Typically such behavior can have a noticeable impact on a company’s stock price but not to the extent to which GameStop has risen. What made such drastic appreciation in the share price came from the resulting short-squeeze this upward share price momentum triggered.

At the time, GameStop had a large short position against it. In other words, hedge funds were betting that the share price was going to fall – not a bad assumption given the state the company was in at the time. But if a stock price increases substantially, then short-sellers can be forced to close their position to prevent further losses.

However, the act of closing a short position, in turn, increases the stock price further. This then forces other short sellers to close their positions as well, creating a loop that forces the share price to new heights.

An improving financial position

GameStop’s management team is taking full advantage of its elevated share price. It’s subsequently completed two rounds of fund raising by issuing new shares. In April, the company sold 3.5 million shares and raised a total of $550m. And more recently in June, it sold an additional 5 million shares raising a furter $1.1bn.

Consequently, in its first-quarter earnings release, the business boasted a much improved balance sheet. Some highlights of the report were:

• Net sales increased 25.1% to $1.28bn
• Operating loss of $40.8m compared to $108.0m a year before
• Net loss of $66.8m, versus $165.7m in Q1 2020
• Long-term debt was completely repaid.

Where is GameStop share price going from here?

While I can’t deny, the financial position of GameStop has improved drastically, the valuation is still quite inflated in my eyes. It seems investors have regained faith in the new strategy being employed by the management team. However, whether they can deliver on shareholder expectations has yet to be seen.

Suppose GameStop fails to turn itself around even with the newly found funding. In that case, I wouldn’t be surprised to see its share price fall just as quickly as it went up. Personally, the level of risk is too high for my tastes, therefore I won’t be adding it to my portfolio today.