GameStop shares drop 60% as frenzied rally loses steam

GameStop shares plunged 60% Tuesday in a further reversal of the recent blockbuster gains that grabbed people's attention far beyond Wall Street.

The video game retailer's stock shot up an eye-popping 1,600% in January following a social-media led campaign to boost the price at the expense of big Wall Street funds who were betting on a decline. The dramatic increase, with little connection to investing fundamentals, spurred warnings that things could turn around just as quickly.

GameStop shares fell $135 to $90. The 60% drop was the worst yet for the stock and follows a 31% decline a day earlier. The stock had risen as high as $483 last Thursday, far above the $17 it fetched at the beginning of the year. The sudden swoon this week could dash some investors’ hopes of cashing in big.

“These things can last longer than people expect, but when they unwind, they can unwind pretty fast,” said Ross Mayfield, investment strategist at Baird. “When it’s complete speculation mania and gambling, someone is going to be left holding the bag.”

The extreme moves in GameStop have been driven by a frenzy of speculative trading and appear to have little to do with the actual prospects of the company, which has been losing money consistently.

The business model of the mall-based retailer of physical copies of video games has taken a beating as fewer people go out shopping in malls and as more people download video games instead of buying them in stores. That led some big financial institutions to “short” the stock, or bet on the price to fall.

Investors on Reddit and other social-media portals have banded together in recent weeks to snap up shares of GameStop, AMC and other struggling chains. Some of the institutions that thought the stocks would decline have now admitted defeat and walked away from those bets in a stunning reversal of financial power on Wall Street.

The number of GameStop shares that have been shorted (bets that the stock will fall), were slashed by more than half in recent days, according to a report Monday by the analytics firm S3 Partners.

As GameStop’s shares plunged Tuesday, its followers on Reddit got some encouragement from Mark Cuban, the entrepreneur and owner of the Dallas Mavericks.

“No disruption is easy or happens in a straight line,” Cuban said in an “Ask Me Anything” discussion on Reddit’s WallStreetBets. “Stay with it. I am a believer.”

He said he does not own any GameStop shares, but said what smaller traders are doing to its stock is the same thing that professional investors have long done to each other on Wall Street.

But now, instead of one hedge-fund manager trying to squeeze another who had built up big bets that a stock’s price would fall, it’s smaller investors communicating over the internet doing the targeting.

“What I love about this now, is that if you pick your spots right and work as a group, you can hit again and again,” he said in the forum.

Many posts on WallStreetBets, where users have been encouraging each other to buy shares in GameStop and other stocks, urged their fellow traders Tuesday to resist the temptation to sell.

“In a week, we’ll be stoked we got these for so cheap!” one Redditor reasoned. Another boasted “I just bought 3 more shares because of the dip. Let’s go! Hold!”

The sell-off didn’t spook one Redditor, who declared “Down $68 but HOLDING.”

Beside GameStop, which is based in Grapevine, Texas, shares of favorites of the online crowd fell as well. AMC Entertainment fell 41%, headphone maker Koss Corp. slid 43% and BlackBerry dropped 21%. The S&P 500 index, meanwhile, closed up 1.4%.

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AP Business Writer Stan Choe contributed to this report.

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