Why Did Reddit Trigger a GameStop Stock Surge?

[Vanadium 50]

In the one case your maximum loss is 1,000 dollars, in the other one it's 2,000 dollars. Seems straightforward to me.

You are correct. However in this case there has never been a day since fund inception (or even the US stock market) when losses hit even $500. So it's more a theoretical than practical objection. There is also the practical difference that one pays for this leverage (the fund manager takes the risk you describe, not the buyer, and this comes out in fees).

But I think my point remains. You can restrict Product X, but the market can create a Product X' that is substantially similar. If you reason you restricted Product X was that it was too complicated for an inexperienced investor to figure out, odds are that Product X' is even more complicated. And any restriction leads to the complaint "I'd make a ton of money, but I am not allowed to. The game is rigged!"

 

[russ_watters]

Well, as I see it with currencies poppig up in games (so called trading included) some people started to sense currency as a game.

Yeah, good point. You might even throw bitcoin into this. It blurs the lines between figurative and literal for my "video game" comment earlier (in video games people spend real money on virtual currency).

 

[Vanadium 50]

To me, morally, those are the same person, even if they don't see it that way.

Can you elaborate? I thought we were talking about unsophisticated investors. Can they act immorally without a mens rea?

 

[russ_watters]

But I think my point remains. You can restrict Product X, but the market can create a Product X' that is substantially similar. If you reason you restricted Product X was that it was too complicated for an inexperienced investor to figure out, odds are that Product X' is even more complicated. And any restriction leads to the complaint "I'd make a ton of money, but I am not allowed to. The game is rigged!"

I agree that professional investors will always find more complicated ways of making and losing money, but from what I've seen, the backlash is usually against them, not in support of them. The reversal of that is one of the unique features of the current situation.

Can you elaborate? I thought we were talking about unsophisticated investors. Can they act immorally without a mens rea?

I'm talking about casinos and brokerage firms profiting from unsophisticated "investors"(and maybe a guy sitting at the table who is cheating). The winner and loser are literally the same person. A brokerage firm makes money either way, whereas to a casino a winner is just someone who hasn't played long enough to lose yet. In both cases, the goal is to keep them playing because over time, the casino/brokerage is guaranteed to make money. Casinos are worse, though, because their game is negative sum and requires their customers to lose.

 

[Vanadium 50]

Channeling my inner Marxist, if life is better for capitalists, isn't it better for us all to become capitalists? Investing in the market let's us do that. I've done very well indeed doing this. And once you have markets, you have different people holding different values in their heads, and you can't avoid speculation. I think Pepsi has a brighter future than Coke, you think the reverse, so we trade.

I think it is true that brokerages have carved out niches on the investing vs. speculation spectrum, with maybe TIAA/CREF on one side and Roibinhood on the other. What I find objectionable about Robinhood is that their fee structure and product selection are such that it guides their clients into investment choices that are more beneficial to Robinhood than the clients. How many boring no-load no-fee mutual funds can you buy on Etrade? Four thousand four hundred and eighty. On Robinhood? Zero.

Robinhood is also cagey about how it makes its money. If you know to look at its "Rule 606 Disclosure" (and you have to know that's what you want to look for) you will discover that it gets about 3x as much for "payment for order flow" as, say, Etrade. Robinhood would probably argue that they are picking which market maker to use based on whoever gets their customers the best price, and it's either coincidence or savvy that they get three times as much as everybody else this way. Their model is very much like Google and Facebook - you are not the customer. You are the product. Robinhood's customers are the market makers.

Finally, there exist rules to try and reduce the risk inexperienced investors might face. For example, Pattern Day Traders need substantially more equity (and often cash on hand) than other traders. You can see thousands of messages on various boards discussing how to get around this. People who underestimate risk well, they tend to underestimate risk.

 

[Office_Shredder]

You are correct. However in this case there has never been a day since fund inception (or even the US stock market) when losses hit even $500. So it's more a theoretical than practical objection. There is also the practical difference that one pays for this leverage (the fund manager takes the risk you describe, not the buyer, and this comes out in fees)

If the complaint is that these are complicated products where investors don't understand the risk, I think they understand the risk of a 2x levered etf pretty well, you can lose all the money you put in. I would be surprised if someone was confused by that, and if they are, well you can lose all your money doing anything in trading so I'm not sure what we're supposed to do to help them. A 2x levered s&p500 etf is still less volatile than like, half of all stocks.

To be honest, letting people lever up 2x to buy the s&p500 is not the worst thing in the world. We let people lever up 5x or more to buy a house... What is the difference between taking out a mortgage and buying some stocks, vs taking out a smaller mortgage and buying those stocks with leverage? Not a lot.

 

[russ_watters]

Channeling my inner Marxist, if life is better for capitalists, isn't it better for us all to become capitalists?

I'm pretty sure you aren't a Marxist, so while I appreciate the irony, I think you probably know of an error of his that is relevant here: Marx believed free markets were fundamentally and fatally unfair and unstable. And maybe he was right, but one thing he didn't foresee was that regulation could dampen the instability and level the playing field. I think you made the point earlier that for the most part individual investors should avoid competing with professionals. There are some regulations preventing some unfair advantages and exploitations, both for unfair competition and collaboration. I favor that. Robinhood and the GME fiasco may be an example needing more protections on the amateur side. But I recognize that protecting someone from being cheated by someone else is fundamentally different than protecting someone from their own bad decisions. But maybe the SEC will find fraud here and make this debate somewhat moot.

I think it is true that brokerages have carved out niches on the investing vs. speculation spectrum, with maybe TIAA/CREF on one side and Roibinhood on the other. What I find objectionable about Robinhood is that their fee structure and product selection are such that it guides their clients into investment choices that are more beneficial to Robinhood than the clients. How many boring no-load no-fee mutual funds can you buy on Etrade? Four thousand four hundred and eighty. On Robinhood? Zero.

So it's marketed toward unsophisticated investors and structured to guide them toward complicated/risky investments that aren't in their clients' best interest? Yeah, I find that unethical too.

But I do get how the specific case we're talking about can be framed as so basic that it is hard to regulate/judge. If one guy wants to buy a share of a stock at $400 and another guy wants to sell it to him, why should anyone (regulators) object to that? Well, we have to look at it in... context.

 

[russ_watters]

A new article in USA Today discussing what we are discussing:
https://www.usatoday.com/story/mone...rs-gamestop-hearing-roaring-kitty/4442330001/

And contrary to all the company's hype, critics say Robinhood is not about leveling the playing field for the little guys. Rather, it's about finding a better, faster way to separate them from their money...

"The way the app is set up, gamification is used to nudge investors into those practices that are most profitable to Robinhood – frequent trading, trading on margin and trading options," said Barbara Roper, director of investor protection at the Consumer Federation of America, a consumer advocacy group. "This is not remotely appropriate for unsophisticated, new investors."

Roper said that if a brokerage were really designing a system with the interest of the investor in mind, traders would face hurdles before being able to trade options or trade on margin, which means trading with borrowed money. They would have to pass tests to make sure they understood the risks.

"Instead of that, they make it as easy as possible," she said.

In December, regulators in Massachusetts filed suit against Robinhood, claiming the stock trading app treats investing like a video game and lures young and inexperienced investors into taking on excessive risk...

"As a broker-dealer, Robinhood has a duty to protect its customers and their money," Secretary of the Commonwealth William Galvin said in a statement when the suit was filed."Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts."

 

[Vanadium 50]

Most brokerages execute orders at or better than NBBO (kind of a national average) around 97% of the time. There is one outlier at 93%. Most brokerages have a price improvement percentage of about 80-90% - i.e. the fraction of time they do better (not just "as good or better"). One outlier doesn't make this information public.

The outlier is Robinhood.

I'm pretty sure you aren't a Marxist

Not so fast, Tovarich. ++L

But maybe the SEC will find fraud here and make this debate somewhat moot.

We will see. A very interesting question is how Keith Gill got $14M in cash. If he got it by selling GME at the same time he was exhorting others to buy, he may be in a bit of trouble. The lawsuit was mentioned upthread, but I can't see how suing him for billions will work. He doesn't have billions. MassMutual, on the other hand, has the deep pockets, but was not sued.

 

[BWV]

If the complaint is that these are complicated products where investors don't understand the risk, I think they understand the risk of a 2x levered etf pretty well, you can lose all the money you put in. I would be surprised if someone was confused by that, and if they are, well you can lose all your money doing anything in trading so I'm not sure what we're supposed to do to help them. A 2x levered s&p500 etf is still less volatile than like, half of all stocks.

To be honest, letting people lever up 2x to buy the s&p500 is not the worst thing in the world. We let people lever up 5x or more to buy a house... What is the difference between taking out a mortgage and buying some stocks, vs taking out a smaller mortgage and buying those stocks with leverage? Not a lot.

Cant lose all your money in a levered ETF unless there is a one day decline of ~50% or more, as it resets daily (which is why these funds are long term losers)

Big difference between mortgages and stock market leverage - the bank cannot call your mortgage if the loan-to-value drops below a certain threshold. Now, if I could get a 30-year, fixed rate no recourse margin loan at current mortgage rates, that would be great - but who would make that kind of loan? The reason market leverage is regulated is to protect the stability of the overall system. If there is too much leverage in the equity markets and prices then drop sufficiently, you get a vicious spiral of forced selling to cover margin calls (arguably this happened during that first wave of selling in March)

 

[mfb]

@russ_watters: I have written my very specific point clearly and more than once. You ignored it every time, instead you chose to invent absurd straw-man arguments and decided to refute these. It's easier to "win" arguments if you write for both sides, I guess. But it's clear that the discussion can't lead anywhere that way.
The only thing I "attacked" were your misrepresentations of my posts. I would see that as defense, however, and the misrepresentation as attack.

 

[phinds]

It's happening again. GameStop opened at 44 and closed at 91 then after-hours went up to 200 briefly and is now (10pm 2/24) at 168. Some of the other reddit-promoted stock also jumped but not by as much as GameStop. They DID get a new CFO but that's not justification for this kind of jump.

 

[Vanadium 50]

Does anyone think they are investing in GME because they think it's about to turn the corner? At this point, pretty much everyone is investing in GME because they don't want to be left behind when it zooms even higher. Because stonks!

And what's so wrong with that? The price is no longer driven by fundamentals, everybody knows that price isn't driven by fundamentals, some people are going to win big and some people are going to lose their life savings. So, let the games begin!

PS You mentioned a price for GME. That makes mfb cross.

 

[russ_watters]

Does anyone think they are investing in GME because they think it's about to turn the corner?
[snip]

Who is "anyone"? Us, the Reddit Army, the hedge fund managers, media pundits, or do you really mean anyone/everyone?

[snip] The price is no longer driven by fundamentals...

Right now, evidently, it's being driven by an ice cream cone emoji. Yes, I'm serious.
https://www.dualshockers.com/ryan-cohen-ice-cream-cone-did-one-tweet-doubled-gamestops-stock-price/

At this point, pretty much everyone is investing in GME because they don't want to be left behind when it zooms even higher. Because stonks!
[snip]
And what's so wrong with that? ...everybody knows that price isn't driven by fundamentals, some people are going to win big and some people are going to lose their life savings. So, let the games begin!

I've vaguely considered betting against the irrationality of the Reddit Army, but it is hard to predict what an irrational group is going to do...beyond of course acting irrationally. In that way, they're somewhat predictable. But if I'd bought a few shares at 50 when it settled down for a couple of weeks, hoping to unload them on a 22 year old redditor at 100 the next time they got bored and picked up this video game again, that would just make me a big meanie, wouldn't it?

PS You mentioned a price for GME. That makes mfb cross.

No, I think it's any suggestion that the redditors aren't polished, responsible, mature, intelligent (rational) investors that does it.

 

[Vanadium 50]

Who is "anyone"? Us, the Reddit Army, the hedge fund managers, media pundits, or do you really mean anyone/everyone?

I do pretty much mean "anyone". Oh, sure, I bet someone can find someone clueless enough to think $150 is a sensible price based on fundamentals, but that's like picking a flat-earther to explain geography.

(A $10B company at P/E of 20 means $500M/year of earnings. GME's sales are around $4B/year. Earnings are negative: $-200M/year.)

I've vaguely considered betting against the irrationality of the Reddit Army, but it is hard to predict what an irrational group is going to do...beyond of course acting irrationally.

As Keynes said, the market can remain irrational longer than you can stay solvent.

I am not a Jim Cramer fan, but he said one very wise thing (maybe only one) - "This isn't a good company to invest in, but it is a very good trade." That distinction is important: GME is not a company I would invest in (at $150) but there may be a good trade.

I would also factor in the possibility of GME issuing more stock, which would dilute the value of existing shares. I am certain GME is pondering this - it would be malfeasance if they weren't - and it will certainly perturb the system.

that would just make me a big meanie, wouldn't it?

Yes. That's exactly what it would make you.

 

[mfb]

PS You mentioned a price for GME. That makes mfb cross.

I know you can distinguish between posting news and posting sarcastic comments. I don't understand why you keep choosing the latter.

No, I think it's any suggestion that the redditors aren't polished, responsible, mature, intelligent (rational) investors that does it.

That's nonsense and you know it.

 

[nduka-san]

i wonder how long this will happen?

 

[nduka-san]

The outlier is Robinhood.

good old robinhood :(

 

[phinds]

i wonder how long this will happen?

It will go on until it stops.

 

[mfb]

*The game will go on until it stops.

Peaked at 170 on Thursday, closed at 100 on Friday.

 

[phinds]

*The game will go on until it stops.

Peaked at 170 on Thursday, closed at 100 on Friday.

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

 

[Klystron]

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

Correct.

This image shows a plot of GME price versus time-of-day over 5 days confirming an ~200 price late 24 Feb 2021.

Using tradingview.com software with optional Bollinger bands. If you want to change views or use other measures of GameStop price fluctuations, build your own chart using the free trial software.

 

[Vanadium 50]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

 

[Vanadium 50]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz. Barber and Odean wrote a very famous paper "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" in 2000 which is the source of the following very famous plot:

Anyway, the 2021 paper does a few things. In my mind, the most interesting is that they have a unique handle on what Robinhood users are actually doing by looking at outages and seeing how overall market transactions change. This doesn't tell us anything we didn't already suspect - no surprises here - but I for one prefer evidence to "it seems to me that..."

They also discuss what they call "herding events", days when the number of Robinhood users owning a particular stock increases dramatically. These are generated by external attention (e.g. Reddit). They show that returns following such events are typically negative,

 

[Klystron]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

I have been using the free Trading View trial package to peek at recent market fluctuations. If the paid service does not provide what you need, I think you can output data streams for further processing.

https://www.tradingview.com/

 

[mfb]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz.

Interesting paper. Something went wrong with the link. Here it is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077

Figure 6 shows that events with larger herding effects tend to have larger negative returns.

 

[Vanadium 50]

Thanks for fixing the link.

Another interesting thing is that there are strong positive returns immediately before the herding events.

 

[mfb]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

So much speculation going on.

https://finance.yahoo.com/news/game-stop-gains-another-20-extends-five-day-rally-163401966.html

 

[phinds]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I DO think it might have moved up slightly from a $20 stock since they are changing executives (well, at least one) and are re-planning the business model. But there's still no way this is a $200+ stock.

 

[Vanadium 50]

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I think the justification is not that people intend to collect some of GME's profits. It's that they intend to sell to someone else at a higher price. Like today at nearly $300.

AT $300, the company is worth $20B. At 4-5% ROI that means an expectation of profits around $1B/year. GME's sales are around $5B and dropping, and are losing about $400M/year. To support a proce of $300, one needs to believe that GameStop can increase sales by 28% at no increase in cost, or decrease costs by an equivalent amount with no decrease in sales, or some combination.

That's asking a lot of new management.

 

[mfb]

I think the justification is not that people intend to collect some of GME's profits. It's that they intend to sell to someone else at a higher price. Like today at nearly $300.

Peaked at $350 and then fell to $200 in half an hour.
I have seen lotteries that were more predictable.

 

[Stephen Tashi]

Interesting paper. Something went wrong with the link. Here it is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077

We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices.

What are "fintech brokerages"?

 

[Vanadium 50]

What are "fintech brokerages"?

Robinhood and its ilk.

 

[Stephen Tashi]

Robinhood and its ilk.

I'm unfamiliar with "Robinhood" and the properties that characterize it.

On the web, I see the term "fintech" used as a company name. The company is accused of offering "pseudo automated trading" software.

 

[Vanadium 50]

I'm unfamiliar with "Robinhood" and the properties that characterize it.

I think Google will provide you more about what Robinhood is and what it does, and do it faster than me typing it in.

 

[Stephen Tashi]

Google knows what Robinhood is, but I don't see a generic meaning for the term "fintech". I see there is a company or companies that have "Fintech" in their names.

 

[BWV]

Google knows what Robinhood is, but I don't see a generic meaning for the term "fintech". I see there is a company or companies that have "Fintech" in their names.

generic name for financial service companies utilizing IT to disrupt traditional business models

 

[jbunniii]

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

 

[phinds]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

All true.

 

[Vanadium 50]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s).

And with tulips in the 1630's.

 

[Office_Shredder]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

Picking QQQ as an easy proxy for tech stocks, the tech bubble burst wasn't that bad. If gamestop only drops 25% from where it's trading now I'm sure its major shareholders would be ecstatic.

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future. Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

 

[phinds]

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future. Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

I've also heard that economists have predicted 9 of the last 4 bubbles.

 

[jbunniii]

Picking QQQ as an easy proxy for tech stocks, the tech bubble burst wasn't that bad. If gamestop only drops 25% from where it's trading now I'm sure its major shareholders would be ecstatic.

QQQ declined roughly 80% from its peak in March 2000 to its nadir in October 2002. It absolutely was that bad! Many high-flying individual stocks went all the way to zero.

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future.

Unless you bought at the 2000 peak and had to sell before the S&P500 briefly reached that level again in 2007. Or between 2007 and 2013 before the recovery from the credit/housing bubble crash.

And even if you bought in 1997, you were briefly underwater in 2009, even without adjusting for inflation.

Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

That we were in a bubble was blatantly obvious at the time. Of course, the timing of the peak was not possible to predict. As Keynes said, "the market can remain irrational longer than you can remain solvent."

But if something can't go on forever, then it won't. As John Marks Templeton said, "the four most expensive words in the English language are it's different this time."

 

[russ_watters]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

Calling bubbles is tough.

Meaning, calling when they will pop, right? Identifying them isn't that tough, at least when they are extreme.

I was going to agree with @jbunniii at first, but changed my mind. While both are bubbles, they aren't the same kind of bubbles. There's a big difference between the GME bubble and the tech bubble of the late '90s. Those companies were new and unknown**, the internet boom was a real thing, and some did hit it big. Like the gold rushes, most companies lost money, sure, but still, a massive amount of gold was actually mined. So those investors were placing bets on the possibility a particular startup would succeed. It was a crapshoot for sure, but one that had a definite, if unknown possibility of a payout. They were just too loose with their bets, which is a problem that persists today, just not as bad.

GME is different because it's an established company, with history. Really, really bad history. The people betting on GME* aren't betting "without justification", they are explicitly betting against a decade of information that says the company is failing. Now, there is a new and unknown component here, and a potential for turn-around in Gamestop's strategy to go digital. But it's not even a defined idea yet, and it doesn't erase the bad history. Even if the digital part succeeds, it still might not save the company. Valuing/buying GME at $10 or $20 is a bet that the company might not fail, but buying/valuing it a $250 or $450 is asinine.

*Assuming they are actually betting on GME -- I believe many if not most are not betting on GME, they are just playing the wallstreetbets video game with real money.

**Ok, there's one massive exception to that. GME doesn't have a model that could send them in that direction though.

 

[Rive]

And with tulips in the 1630's.

I think it's an important difference that both the tulips and the tech bubble was kind of about buying as (irreal) investment: while the actual events could not happen without selling (what's not yours yet).
While the result might seem similar, within the context the underlying psychology and math are both very different.

 

[Vanadium 50]

Well, Russ, I think there are two ways to look at this. Look at my 28% analysis in #280. 28% is a huge number - if you could achieve 1% at MCD or KO you'd be hailed as the next Jack Welch. But there are millions of people that, by purchasing GME, apparently think 28% is what's going to happen. Given that, is 29% all that much crazier than 28%? 30%?

The other way is this - they are not investing in GME the company. They are investing in an unbacked asset (like Bitcoin) that they believe will appreciate. If you knew for certain GME would be at $700 tomorrow, wouldn't you buy it at $250 today? What if it has a 1% chance of going from $250 to $249 and a 99% chance it will hit $700? I can keep going down this path with various probability distributions, and in many cases it's rational to act on these beliefs in buying the stock - not because you think the underlying company is undervalued, but because you believe the stock price will increase.

 

[BWV]

at year-end, GME had assets of $2.8B and liabilities of $2.2B, so the company should be worth $600M, about what it was trading at on 9/30, right?

wrong - equity in a highly levered firm is a call option on the assets with a strike equal to the value of the debt. The rationale is the equity owner gets all the upside, but the downside is limited to the original investment.

So using a Black Scholes calculator for a call option with a current value of $2.8B, a strike of $2.2B, then just guess at 30% volatility in the value of assets and a 3 year expiration, the equity is worth $900M

No way I can torture the BS calculator to get to the current $18B valuation though

Of course the inputs above can be debated. Three years is generous, as it faces over $315B in debt maturities spaced over the next three years. 30% vol is a WAG and the
assets may be worth considerably less than book value.

 

[Vanadium 50]

No way I can torture the BS calculator to get to the current $18B valuation though

Aren't you limited to $2.8B? The best that can happen is all the debt goes away on Day One.

 

[BWV]

Aren't you limited to $2.8B? The best that can happen is all the debt goes away on Day One.

yes, but not for that reason, you just would never pay more for the option than the value of the underlying (and why you only do this for highly levered companies as for, say Microsoft, this option valuation would be so far in the money it would be about the same as the asset value)

 

[Vanadium 50]

yes, but not for that reason, you just would never pay more for the option than the value of the underlying

Isn't that the same thing? The net value is the value of the assets less the value of the liabilities, so you get a max value by zeroing the liabilities.

assets may be worth considerably less than book value.

I would suggest that if there were an analysis more sophisticated than "stonks always go up!" it would go something like this. The assets also include a 3-year revenue stream. The valuation of that is difficult: US Treasuries pay 0.31% for three years now. MetLife and Prudential have dividends of over 5%. You quickly run into the problem of needing either crazy increases in profitability or to argue that GME is much safer than Prudential - maybe on par with Treasuries. Pay no attention to the price swings behind the curtain.

PS At $18B, GME is about half as large as Prudential.