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Why GameStop Is Tumbling 15% This Morning

By Rich Duprey - Feb 9, 2021 at 10:33AM

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The video game retailer is still experiencing significant volatility tied to the short squeeze of the past few weeks.

What happened

Shares of GameStop (GME 0.92%) were tumbling 15% in morning trading Tuesday as the momentum the video game retailer built up during the Reddit rally continues to dissipate.

So what

After the short interest in GameStop fell to more earthly levels from the stratospheric orbit it previously traveled in, maintaining heavy volume in its shares would be impossible. Brokerages like Robinhood that had restricted trading in the retailer's stock for several days now have no limits on buying or selling GameStop's stock or options.

Road sign reading "Volatility Ahead."

Image source: Getty images.

Now what

Trading in GameStop's stock going forward will likely more narrowly reflect the market's belief in its business prospects rather than representing a crowdsourced attempt at inflicting pain on hedge funds.

Jumping on the bandwagon at the time might have been fun, but it was detached from any long-term analysis or notion of whether GameStop can navigate its industry's transition to online and digital gaming.

The stock got a reprieve due to the massive short squeeze, but now investors need to figure out whether the retailer has a plan to grow the business. They will also need to decide whether GameStop's stock price -- which is still some three times higher than at the start of the New Year -- is appropriate, or, more likely, a lower valuation is warranted.

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