FinLogic FinLogic Quantitative Think Tank Center|GameStop's stock is on fire once again and here's why

Investors in GameStop are FinLogic FinLogic Quantitative Think Tank Centerback on board a volatile roller coaster more than a year after the so-called "meme stock" phenomenon nabbed headlines in early 2021.

While GameStop's recent highs are not nearly as close to the surge last year (when its stock hovered around $400 a share at one point), experts have said the company's stock price far exceeds what the retailer is actually worth.

"It's hard to make this argument that the price is worth more than $80," said Kevin Mullally, an assistant professor of finance in the College of Business at the University of Central Florida.

On Wednesday, GameStop opened at $175. Since March 1, GameStop's stock has yo-yoed between $78 and $189. On Tuesday, shares dropped 5.1%, resulting in the New York Stock Exchange halting trading of the stock briefly.

These developments have many people wondering why GameStop's stock continues to perform beyond expectations.

The origin story

GameStop is a brick-and-mortar retail shop founded in 1984 where customers buy, sell and trade video games and other gaming accessories.

"GameStop as a business, if we separate it from the stock itself, was a dying business in a sense," Mullally told NPR.

Hedge funds thought the same way in 2021.

"About a year ago, they saw the price of the stock at around $20 was overvalued," and started shorting the stock, Mullally said.

Shorting means investors are betting against the company and will profit if the value of the asset falls.

Last year, amateur day traders banded together to push the video game retailer's stock price higher. The traders, organized largely through internet communities on Reddit, sought to fuel a short squeeze on the video game retailer and trigger major losses for hedge funds.

Melvin Capital and Citron were two of the funds caught in the squeeze, forcing them to buy more GameStop stock to cover their losses, which ended up driving the stock price even higher.

Jaime Rogozinski, the founder of WallStreetBets, a Reddit forum, told All Things Considered last year that, "it's the democratization of financial markets" that is "giving a voice to the people that didn't previously have one."

Mullally didn't expect the fanfare over GameStop to last nearly as long as it has.

"My prediction was that this couldn't persist because eventually people were going to lose money. Eventually this would have to end," Mullally said. "So far I have been proven wrong."

That's largely due to the support of online communities.

"Anytime this dips under $100, people come back in and prop it up," he added.

What's going on now and why?

Part of this bump in price is likely thanks to GameStop chairman Ryan Cohen purchasing shares in the company, said Christopher Kardatzke, the co-founder and chief technology officer of Quiver Quantitative Inc., an alternative data company for retail investors.

Last week, Cohen purchased 100,000 shares of the video game retailer — bringing his ownership to 11.9%, CNBC reported. He purchased these shares through his investment company, RC Ventures

A move like this "is seen as an indicator of the insider sentiment of their own company. It's a valuable metric," Kardatzke told NPR. "This likely caused more people to have more confidence in investing in GameStop."

Traders closely monitoring GameStop have no doubt witnessed the volatility of the stock itself, he said.

"When you see price movement in a stock like GameStop it generates a lot of discussion and gets a lot of people interested in what it's going to do next," Kardatzke said.

Mullally noted that it likely all comes down to supply and demand.

The more interest GameStop stock generates, the more demand some traders seem to have for it, he said.

Mullally admits he remains baffled by the interest in a stock that he views as not especially valuable.

"GameStop as a company is not doing anything productive," he said. "But it's like people buying pet rocks or Beanie Babies. Those things are fundamentally worthless. It's strange and I don't understand it. But there are a lot of strange things that people buy and I don't understand."