How Reddit Made GameStop Worth $17 Billion Dollars #scottsthoughts

Welcome to Success Story, the most useful podcast in the world. I'm your host, Scott D. Clary, and today I'm going to break down how GameSpot achieved a $17 billion valuation after some Reddit fans basically took a dying company out of the ashes made it rise again and caused finance, investment bankers to lose billions of dollars. This is normally a business growth case study, but this is just a really interesting business story. A little bit of growth, a little bit of just what the hell is going on, let's get right into it. Alright, so I'm well aware that you may know the GameStop story, or you may have heard the GameStop story, but I digress, I'm going to double down on it because I think it is an incredible story, and I think that it has a lot of lessons and tellings that some are related to business, some are related to investment, just some really good takeaways that can be brought out of the madness that took place just a few months ago. So this is business story time, let me break it down for you. Let me talk about GameStop, let me talk about what happened with GameStop and Reddit in the stock price and the shit show that happened that you've probably heard about. Also AMC was involved in this sort of investor madness, but before I go too far, let's start at the beginning. So let's talk about GameStop. So GameStop was a household name in the 90s. I definitely remember GameStop, I remember buying games, I remember even like as a kid like stopping in and like playing games, I'm not mistaken, because I think they had like video game terminal setup. So I definitely remember GameStop, it was great, but of course two decades later or rather like almost three decades later, brick and mortar is not a much a thing anymore. It's obviously going the way the dinosaur and COVID kind of expedited this. So you know over the past 30 years, institutions like GameStop have really lost a lot of traction. Brick and mortar isn't really where people go to buy their goods to buy video games. And now fast forward, you know 2021, how we play video games, how we buy video games is all online and we purchase them online, but back when GameStop was first a thing that wasn't the case. So let's go back. So before the dawn of internet and online gaming, GameStop was a cultural touch point for gamers. So GameStop actually traces its roots to be beige. I hope I pronounced that correctly, B-A-B-A-G-E, which is a Texas based software retailer. They were founded in 1984 and over the decade after 1984, over 10 years after 1984, they went through multiple mergers, acquisitions, and they finally acquired the American book selling company Barnes & Noble in October of 1999. This is when the GameStop brand was launched. So by 2001, GameStop had thousands of stores across North America. And it wasn't just a place to buy games. It was a cultural institution where like-minded individuals could go in, peruse and browse the latest games. You could play games, you could get your merch, you get your, like, ancillary trading card products or figurines or other stuff that came with or revolved around the universe of some games. You would meet people that loved video games. It was just a vibe. I don't know how else to say it. It was just a video game vibe. And it also did a lot of things that were a little novel at the time. So of course you could buy games, but it also allowed for trade-in programs where you could trade in games for credits and it allowed people to sell their old games and get new games at discount. It was a lot of fun. It was a really good store. And it was during this time that Sony and Microsoft launched PlayStation 2 and Xbox respectively. And because of the incredible search of console games, GameStop, their stock went through the roof. Like, the IPO a few years later, but their stock grew considerably. And their success and their revenue. Because PlayStation 2, Xbox, everybody was purchasing physical copies of games. And you could actually see the stock price of GameStop tied to the release of a new console. So when a new console was going to hit the market and there were discussions or announcements about new gaming consoles, you could actually see GameStop's pricing fluctuating, increasing, decreasing when there was a law or when there wasn't much activity going on or nothing new was being released. But it was definitely tied to the release of new consoles. So GameStop formally went public February 13th, 2002. They raised $325 million in their initial public offering. In 2004, it became an independent entity and it bought its rival EB games or electronic boutique games for $1.44 billion. And this made it the most prominent game distributor globally. A year later in 2005, GameStop had roughly 4,400 outlets operational worldwide. And all of these 4,000 plus retail locations, again, like I mentioned, a lot of the success of GameStop was tied to the release of new consoles like new PlayStation or new Xbox or new even new games and they started to have release events in GameStop to commemorate and celebrate and evangelize new games, new consoles, new releases, whatever. So there's a lot of in-person physical activity happening at these stores. GameStop's stock reached an all-time high in 2007. They acquired a micromania, a video game company from France in 2008. So that added 332 video game stores in France, increasing their already growing, you know, at this point, 5,000 plus brick and mortar locations. But it was actually after the financial crisis of 2008, 2009, okay, in 2010, the economy is starting to recover, meaning that there's more competition entering the market, especially in the video game space. And the gaming industry started to shift to digital. So more companies were launching games as digital first options, meaning that you didn't have to buy anything to play the game, you could just go online. And GameStop tried to adapt, they tried to sell downloadable content, but they were still the middleman. And GameMakers realized that, well, why would we go through GameStop when we can just launch our games and sell them directly to our customers without paying any sort of fees or without discounting our products, going through middleman for distribution, because why don't we own distribution ourselves? And the internet, unsurprisingly, became the universal gaming platform. For instance, in 2009, Zingo launched Farmville and Cityville and Facebook. Four years later, Xbox One and PlayStation 4 were launched. Both of them were offering completely digital storefronts. And GameStop at this point is struggling, like they're scrambling to think of what to do next. They started purchasing other retailers. They purchased Spring mobile, simply Mac. They purchased some AT&T stores in an effort to diversify and just find other ways to drive revenue. But notice how they're still only focused on brick and mortar. And the true decline of GameStop's once prominent position at the top was in 2016-2017. The company reported a 16.4% drop in sales for the 2016 holiday season. And they were, for the first time in their history, forced to close stores. And they still didn't figure out how to go digital. So they kept closing more stores. By 2009, they reported a record net loss of $673 million. Around this time, they started to shake up management, trying to get some new ideas, some new talent in. However, shortly after, of course, COVID hit. And at this point, brick and mortar is just decimated. This forced all of GameStop stores to close in the US. GameStop's stock, or GME, that's a ticker, was worth only $4.22 per share. Remember, it used to be in the hundreds of dollars per share at its peak. The company reported the pandemic resulted in digital sales for GameStop finally growing by 519%, but the retail sales, which was the bulk of their revenue, dropped by 30% from the prior year. GameStop reported $165 million loss in that same period in comparison to a $6.8 million loss for the same period in 2019. However, this is when the story starts to get interesting. So we had now the rise, and we had the fall of GameStop, now here comes a new hope. GameStop was almost all but forgotten, but the internet, as it usually does, has other plans. Around this time, an individual or group of people on the now popular Reddit or subreddit rather, our slash Wall Street bets argued that GameStop was underpriced by the market. The idea that our slash Wall Street bets in the community in this subreddit would eventually start to take over the internet and just become this incredible force of these people from this particular subreddit wanting to purchase GameStop stock. And a variety of reasons as to why they wanted to purchase GameStop stock. It could have been the fact that they had a little sense of nostalgia towards the company could be that some people truly thought it was undervalued and they saw that there was a, for example, 519% increase in digital sales, even though they were hemorrhaging money at this point. The people in the community, because they started to buy GameStop stock, and because they really rallied this community together of all these subredditors, to buy as much stock as possible. And what happened was they actually initiated a short squeeze. Now what is a short squeeze? So what a short squeeze is, they were only able to do it because so many people were already betting that GameStop was going to fail. So because it had lost so much money, all the big finance individuals, investment individuals, anybody that basically, you know, Wall Street, all of these professional investors were betting against GameStop. And what that means is they were saying, you can actually make money when a company loses money if you bet against them. It's called shorting a company. And there's a, there's a technical nuance to how you actually short a company stock. But basically the end result is if you short a company or if you bet against a company, when their stock drops, you make money. It's the opposite of when you invest in a company and when their stock rises, you make money. So you can make money both ends. It's a, it's a, you know, you have to play your, play your odds. So a lot of professional investors and investments, investment institutions rather were betting against GameStop. So what that allowed the Reddit community to do is when they invested and when you invest in something, you are assuming that the price of the stock is going to go up, it initiated a short squeeze, meaning investors were buying the stock up, the subredator investors were buying the stock up, raising the share price to the point where the short sellers or the institutional investors who were betting against the stock price appreciating and they're betting against, they were hoping that GameStop eventually bottomed out. They needed to buy more stock to cover some of their losses because now if the share price is going up, the people that are betting against the company are losing millions and then billions of dollars. So they have to actually buy some stock to basically cover, to cover the fact that they're losing so much money, which in turn sends the price even higher. So the result is GameStop's share price soaring roughly 1500% in just over two weeks and they reached a new all time high of $483 on January 29th, 2021. And then of course, like classic Elon Musk, this is again, another added ingredient into the story. So then Elon Musk tweets, and whenever Elon Musk tweets, he has such a massive audience that he starts to push the stock up. So he tweeted GameStop, it's a joke on when you're referring to stock in meme culture. Speaking about the R slash Wall Street bet subreddit community with a link to the subreddit, which then gave the subreddit community and their initiative and the fact that they wanted to invest in GameStop, that much more exposure, which then led to the stock price going even higher and it's just funny how Elon gets involved in this stuff, he probably gets a kick out of it. So later that year, after this whole thing, so the stock price is shooting up, but it's very volatile, right, because there's no actual business merit for the stock price going up. Usually when a stock price goes up that much, well, actually, stock prices don't in large, large large large organizations, you don't usually see that much volatility in stock prices where it's shooting up 1500% and usually it's based on revenue and growth and all the regular things that you think a business has to have positive revenue, of course, and year over year growth to give the potential investors some sort of sense of comfort and investing in the stock. But because there was no merit, it was almost just based on principle, they're investing in the stock highly volatile up and down, a lot of people made millions, a lot of people lost millions and billions, but it was an incredible period of time. So anyways, that was sort of the event that gave GameStop a little bit more, a little bit of exposure and a little bit of life. So later that year, Board of Directors saw changes, new Chairman, new CEO, new CFO, Ryan Cohen, the Chairman believed GameStop had the potential to become a technology-driven leader in the gaming industry and he urged the Board to shift the company's focus towards that goal. Seeing now that there was some awareness of the company after this whole Reddit fiasco, the company's stock price later on in the year, again, after this whole Reddit fiasco was again boosted by Cohen's desire to shift away from brick and mortar retail. So let's fast forward now to January 2021, nobody at this point ever thought the GameStop after it reached its high and its peak and then regressed so dramatically whatever get back to any sort of notoriety that originally had. So for many people, this is why they wanted to short it. But because of this whole event that occurred, OK, so GameStop didn't really reap any benefits of this stock rally per se, maybe a couple executives that were holding some shares made a little bit of money. But realistically, it really just gave it some exposure and some life and breathed some life into it again. So at the moment, GameStop has additional exposure, has a highly volatile stock price, is still in nearly $500 million worth of debt, but still has 5,000 stores worldwide. So in February of 2021, just a few months ago, GameStop hired X Amazon Engineering Lead Matt Francis as CTO and Matt Francis' job is to guide the company towards this new vision. So you breathe life into a company, chairman steps in, wants to sort of double down on new vision for the company, ride this moment, ride this wave. So the surge in the stock price may not have saved GameStop, but it definitely gave them a little bit of hope, a little bit of fire, Sean, a light on them. And it's an incredible example, and it's an incredible example of what the internet is capable of. And who knows where GameStop's going to end up in the future, because of this exposure and this momentum. So six lessons that I want you to take away from this GameStop story. Number one, never underestimate the internet, building an incredible community as you saw with Wall Street Bets. If you can build that community, you can leverage that community, you can make a business, you can break a business, the end of the day, internet is incredibly powerful. Use that to build a community to tap into, to create whatever it is you want to create. Lesson number two, whatever your business is and however successful you are, you always have to stay ahead of the curve. And we've seen this with, we've seen this with Airbnb killing off the hotel industry, we've seen this with Uber killing off the taxi industry, we've seen this with Netflix and Blockbuster. Stay ahead of the curve, understand that even if you have it good and you are doing well, that success is never guaranteed forever in business and in life. Lesson number three, be careful what you invest in. A lot of people in that Wall Street Bets community lost a lot of money because they were investing in a highly volatile stock that had really no merit behind it. It had no real reason being the price that it was being valued at. So just be careful what you invest in and if you are going to make these kinds of decisions to invest, make sure you only invest what you're willing to lose. And none of this article was financial advice, that's a caveat. Lesson number four, the future of any successful business has to incorporate a digital component. Digital is the way that you connect, the digital is the way that you scale, internet is the way that you build community and also reach a global audience in a way that they want to be sold to market it to and communicate it to. So if you can't tap into the power of digital, if you are stuck in a latent mindset where you think that you can still operate the way your business did 10 years ago, and for example, say you've only ever done brick and mortar, there are very few businesses that I think that's a good idea to stay stagnant and to stay in that position. I think that the reality is every single industry. Even if you don't see it today will eventually be disrupted in some way, shape or form by somebody that does the business that you're doing and just finding a way to incorporate some sort of digital, internet, social media component. Lesson number five, a successful business is a business that is always reinventing themselves. I've said this a few times throughout this monologue here, but if you aren't reinventing yourself and if you're staying stagnant and you're staying the way it's always been, that's when your business is going to die. And also, as a professional, as a person, if you are just the way you've always been, that's also where you stop growing. So in terms of always iterating and always reinventing and always learning new things and always trying to push what you do in a good way so that you can do more and learn more and be more as a business or as a person. This is just a really smart life lesson. And then lesson number six, always seek out a way to future prove yourself. So again, there will always be something new, better, bigger, stronger, faster, makes more money, does something with more enthusiasm, creates a better product, whatever it may be. Just find a way to future prove yourself, which probably includes, you know, really taking the heart lessons one through five. Anyways, that's it for today. I hope you enjoyed it. You found any value in this, share it with your friends, families, peers, co-workers. If you enjoy these business case studies, I send them out in the newsletter once a week and go to newsletter, roioverload.com, you can, you can dive in and I'll walk through business, growth, case studies, startup stories. Or if you like it, you can just, you know, stay tuned on the podcast and you'll get them every once in a while as well. Alright, that's it. Have a great day. I'll talk again soon. Bye now.