How Reddit Made GameStop Worth $17 Billion Dollars

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Growth Story is a weekly podcast that breaks down the strategy and tactics utilized by high growth companies, in a short case study format hosted by Scott D. Clary (@scottdclary).

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Welcome to success story, the most useful podcast in the world. I'm your host, Scott Declary, and today I'm going to break down how game spot achieved a seventeen billion dollar 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 just what the Hell is going on? Let's get right into it, all right. So I'm well aware that you may know the game stop story or you may have heard of the game stop 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, just some really good takeaways that can be brought out of the madness that took place, we'll just a few months ago. So this is business story time. Let me break it down for you. Let me talk about game stop. Let me talk about what happened with game stop and read it and the stock price and this 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 let's start at the beginning. So let's start. Let's start. Let's talk about game stop. So game stop was a household name in the S. I definitely remember game stop. I remember buying games, I remember even like as a kid, like stopping in and like playing games. I not mistaken because I think they had like video game terminal set up. So I definitely remember game stop. It was it was great. But of course, two decades later, or rather like almost three three decades...

...later, brick and mortar is not as not that much a thing anymore. It's obviously going the way the DNA store and covid kind of expedited this. So you know, over the past thirty years, institutions like game stop 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, two thousand and twenty one. How we how we play video games, that we buy video games is all online and we purchase them online but back when game stop was first a thing, that wasn't the case. So let's go back. So before the dawn of Internet and online gaming, game stop was a cultural touch point for gamers. So Game Stop I actually traces its roots to bebige. I hope I pronounce that correctly. Be A BEB age, which is a Texas based software retailer. They were founded in nineteen eighty four and over the decade after nineteen eighty four, over ten years after nineteen eighty four, they went through multiple mergers acquisitions and they finally acquired the American Book Selling Company Barnes and Noble in October of Nineteen Ninety nine. This is when the game stop brand was launched. So by two thousand and one game stop had thousands of stores across North America and it wasn't just a place to buy games. It was a cultural institution where likeminded individuals could go in peruse and brows the latest games. You could play games, you could get your merch you get your like incillary 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 it was a vibe. I don't know. Also say 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 and buy games, but it also allowed for trade in programs or you could trade in games for credits and it allowed people to sell their old games and get new games at discounts. There's a lot of fun it was. It was a really good store and it was during this time that's Sony and Microsoft launched playstation two and xbox respectively, and because of the incredible surge of Console Games game stop, their stock went through the roof. It like they ipoed a few years later, but their stock grew considerably and their success and the revenue because playstation two xbox. Everybody was purchasing physical copies of games and you could actually see the stock price of game stop 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 game stops pricing fluctuating, increasing and decreasing when there was a lull or when there wasn't much activity going on or nothing new was being released, but it was. It was definitely tied to the release of new consoles. So game stop formally when public February thirteen, two thousand and two. They raised three hundred and twenty five million dollars in their initial public offering. In two thousand and four it became an independent entity and it bought its rival Eb Games, or electronic Boutique Games, for one point four four billion dollars, and this made it the most prominent game distributor globally. A year later, in two thousand and five, Game Stop had roughly four thousand four hundred outlets operational worldwide, and all of these four thousand plus retail locations. Again, like I mentioned, a lot of the success of game stop 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 Game...

Stop 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. Game stops stock reaching all time high. In two thousand and seven they acquired Micromania, a video game company from France in two thousand and eight, so that added three hundred and thirty two video game stores in France increasing. They're already growing, you know, at this point five thousand plus brick and mortar locations, but it was actually after the financial crisis of two thousand and eight, thousand and nine, okay, in two thousand and ten, 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 Game Stop tried to adapt. They tried to sell downloadable content, but they were still the middleman, and game gamemakers realize that. Well, why would we go through game stop 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 a middleman for distribution? Because why don't we own distribution ourselves? And the Internet unsurprisingly became the universal gaming platform. For instance, in two thousand nine, zingle launched Farmville and city villa. And facebook. Four years later, xbox one and playstation four we're launched. Both of them were offering completely digital store fronts, and game stop at this point is struggling like they're. They're scrambling to think of what to do next. They started purchasing other retailers. They purchased Spring Mobile, simply Mac they purchased some atnt stores in an effort to diversify and just find other ways to drive revenue. But notice how they're still only focus on brick and mortar and the true...

...decline of game stops once prominent position at the top was in two thousand and sixteen. Two thousand and seventeen, the company reported a sixteen point four percent drop in sales for the two thousand and sixteen 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 two thousand and nine, they reported a record net loss of six hundred and seventy three million dollars. Around this time they started to shake up management try and 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 game stops stores to close. In the US. Game stops stock, or GM that's the ticker, was worth only four dollars in twenty two cents 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 game stop finally growing by five hundred and nineteen percent, but the retail sales, which was the bulk of the revenue, dropped by thirty percent from the prior year. Game Stop reported a hundred and sixty five million dollar loss, and that same period in comparison to a six point eight million dollar loss for the same period in two thousand and nineteen. However, this is when the story starts to get interesting. So we had now the rise and we had the fall of game stop. Now here comes a new hope. Game Stop was almost all but forgotten, but the Internet, as it usually does, has other plans. Around this time, an individual or a group of people on the now popular Reddit, or subreddit rather, are Wall Street bets, argued that game stop was under priced by the market. The idea that our 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 game stop stock, and a variety of reasons as to why they wanted to purchase game stop stock. It could have been the fact that they had a little sense of nostalgia towards the company. Could be that they cru some people truly thought it was undervalued and they saw that there was a, for example, five hundred nineteen percent increase in digital sales, even though they were hemorrhaging money. At this point, the people in the community, because they started to buy game stop stock and because they they really rallied this community together of all these subreditors 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 it would they were only able to do it because so many people were already betting the game stop 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 game stop, 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 player, player odds. So a lot of professional investors and investors investment in institutions. Rather, we're betting against game...

...stop. 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 subreditor 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 their betting against they were hoping that game stop 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 game stops share price soaring roughly one fifteen hundred percent in just over two weeks and they reached a new all time high a four hundred and eighty three dollars on January twenty nine, two thousand and twenty one. 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, such a massive audience that he starts to push the stock up. So we tweeted game stock. It's a it's sort of like a it's a joke on on when you're referring to stock in like mean culture. Speaking about the R Wall Street bets subred a community with a link to the subreddit which then gave the subred a community and their initiative and the fact that they wanted to invest in game stop that much more exposure, which then led to the stock price get going even higher. And it's just funny how you long 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 shooting up, but it's very vaultile right, because there's...

...no actual business merit for the stock price going up. Usual, when a stock price goes up that much. Well, actually, stock prices don't in large or large, large, large organizations. You don't usually see that much volatility and stock prices where it's shooting a fifteen hundred percent, and usually it's based on revenue and Growth and all the regular things that you think of. Business has to have positive revenue, of course, and year over year growth full to give the potential investors some sort of sense of comfort and investing in the stock. But because it was 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. They gave game stop 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 suit CFO. Ryan Cohen, the chairman, believed game stop had the potential to become a technology driven leader in the gaming industry and he urged the Board to shift the company's focused towards that goal. Seeing now that there was some awareness of the company after this whole reddit fiasco. The company stock price later on in the year, again after this whole red a fiasco, was again boosted by Cohen's desire to shift away from brick and mortar retail. So let's you know it, let's fast forward out of January two thousand and twenty one. Nobody at this point ever thought the game stop, after it reached its high and its peak and then regressed so dramatically, would ever get back to any sort of 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. Okay, so games stop didn't really reap any benefits of this...

...stock rally per se. Maybe a couple executives that we're 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 game stop has additional exposure, has a highly vaultle stock price, is still in nearly five hundred million dollars worth of debt but still has five thousand stores worldwide. So in February of two thousand and twenty one. Just a few months ago, game stop hired x Amazon Engineering Lead Matt Francis, as Cteo, and Matt Francis's 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 of ride this wave. So the searge in the stock price may not have saved game stop, 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 game stops going to end up in the future because of this exposure, in this momentum. So six lessons that I want you to take away from this game stop 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 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 are we've seen this with air BNB 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 a 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 a way that you build community and also reach a global audience in a way that they want to be sold to, marketed to and communit it communicated 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 ten 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. Successful business is a business that is always reinventing themselves. I've said this a few times throughout this monolog 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 fashional 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. These this is just a really smart life lesson. And then lesson number six. Always see you get away to future proof yourself. So the again, there will always be something new, better, bigger, stronger, faster, makes more money, does something with more you know, enthusiasm creates a better product, whatever it may be. Just find a way to future proof yourself, which probably includes, you know, really taken the heart lessons one through five. anyways, that's it for today. I hope you enjoy that you found any value in this. Share with your friends, families, peers, co workers if you enjoy these business case studies. I send them out in a newsletter once a week and go to newsletter to Roy overloadcom. You can. You can dive in and I'll walk through business growth case studies, start up 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. All right, that's it. Have a great deal. I'll talk again soon. By now I.

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