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Gaming the system: How GameStop stock surged 1,500% in nine months

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Enlarge / When will this stock [game]stop rising?

Aurich Lawson

Nine months ago, GameStop stock bottomed out at $2.80 a share, a reflection of the myriad problems facing the retailer specifically and brick-and-mortar game retail as a whole. As of Tuesday morning, though, that stock price is hovering around $40 a share (peaking at $44.74 as of this writing), with the vast majority of those gains coming in the last couple of weeks.

Is GameStop really worth up to 16 times as much as it was back in April? Is the company’s ambitious turnaround plan finally (and suddenly) turning things around? Is GameStop roaring its way back to the nearly $10 billion market cap it enjoyed at the height of the Wii phenomenon?

Probably not. Analysts suggest the recent surge in GameStop’s stock price is the result of a massive short squeeze bubble that will pop eventually. But beyond the sky-high valuations of recent weeks, analysts also suggest there’s some reason to believe GameStop’s long-term health is more robust than last year’s stock doldrums suggest.

Here comes Cohen

To understand GameStop’s current stock market run, you have to go back to August, when investor Ryan Cohen bought in to a roughly 10 percent ownership stake in the retailer. Cohen is best known as the founder of pet food superstore Chewy.com, which sold to PetSmart for $3.35 billion in 2017. Since that sale, Cohen has tended to invest his billions in big, safe stocks like Apple and Wells Fargo, so his major investment in the much riskier GameStop attracted notice.

Since August, Cohen has bought even more GameStop shares, and he and two former Chewy executives have been named to the company’s board of directors. That gives Cohen, along with fellow activist investors from Hestia, the potential capability to steer the company in a new direction.

And Cohen hasn’t been shy about identifying what he sees as the problems for the company. “GameStop’s challenges stem from internal intransigence and an unwillingness to rapidly embrace the digital economy,” Cohen wrote in a bold, italicized, underlined, and all-caps portion of a November SEC filing.

“GameStop’s challenges stem from internal intransigence and an unwillingness to rapidly embrace the digital economy”

The company has to “promptly pivot from a brick-and-mortar mindset to a technology-driven vision,” he continued. “If GameStop takes practical steps to cut its excessive real estate costs and hire the right talent, it will have the resources to begin building a powerful e-commerce platform that provides competitive pricing, broad gaming selection, fast shipping, and a truly high-touch experience that excites and delights customers.”

Even as GameStop’s earnings reports continue to be uninspiring, Cohen’s bold talk about a new, less physical path forward for GameStop got some investors excited. “[Cohen’s involvement] has given the market confidence that this profit will be spent wisely to grow the company into an e-commerce competitor, similar to Chewy, instead of doubling down on the brick and mortar strategy,” DOMO Capital Management President Justin Dopierala told Ars. “GameStop’s most valuable asset is their database of tens of millions of PowerUp Rewards members that no other competitor has the ability to replicate. GameStop will be able to leverage this data to become a fierce e-commerce competitor over time and has many unexplored avenues to monetize the data.”

“[Cohen] seems to have a vision of what the company should be in the future,” Telsey Advisory Group analyst Joseph Feldman told Ars. “It’s more experiential, it makes sense given the changes in the market, so maybe it’ll help speed that along. It’s certainly something worth watching.”

“Because you’re buying a month’s worth of pet food every month, you just keep going back like groceries. The game business isn’t like that.”

Others are more skeptical that applying a strategy for selling dog food will be so simple to apply to selling video games. “[Cohen]’s real-world experience is selling commodity products like pet food and toys into a market that has recurring demand for that,” Wedbush Morgan analyst Michael Pachter told Ars. “Because you’re buying a month’s worth of pet food every month, you just keep going back like groceries. The game business isn’t like that. In the pet food/toys business, there is no virtual download, [whereas with] GameStop, all the games they sell, you can buy digitally at the same time.”

The big squeeze

Whether Cohen can turn GameStop around or not, the investor excitement around his new strategy presented a problem for the many investors who had shorted the stock (i.e. borrowed shares that they expected to go down in value). As their short positions came due, those short sellers found themselves having to buy shares at the new, higher price to cover that earlier borrowing.

Ah, for the carefree days when you could wander into a GameStop and not worry about keeping six feet from other shoppers...
Enlarge / Ah, for the carefree days when you could wander into a GameStop and not worry about keeping six feet from other shoppers…

“Demand started with some Robinhood-type retail investors, but once it started going up, then you had shorts that were like ‘Oh shoot,'” Pachter said. “And the shorts were getting killed, so they started covering. And that was a feeding frenzy. Light supply, heavy demand… so the stock’s just getting ripped up… I’ve never seen anything like this in my life.”

Meanwhile, investors who continue to think the stock price is overinflated are continuing to borrow more short positions, confident that the price will come down to earth eventually. Interest has gotten so hot that Thursday saw a trading volume of 144 million shares of GameStop stock, even though there are only about 45 million actively traded shares available.

“I would not be chasing the name here. The smart money already got in and probably got out.”

It’s this kind of feeding frenzy that has led GameStop stock to more than double in the last week, analysts agree, rather than anything fundamental about the real value of the company changing in that time. But that cycle has to end eventually as short sellers run out of capital and available shares to buy. And that peak could be coming relatively soon, according to some analysts.

“There was a massive short position in [GameStop] and I would be very interested to see what happens to the share price when things calm down and the short sellers have to cut their losses on this,” Standpoint analyst Ronnie Moas told Ars. “It could be another new wave of short sellers could come in, but I haven’t closely analyzed the situation… I would not be chasing the name here. The smart money already got in and probably got out.”

Others think this short cycle could keep going for a while, though. “If a short squeeze does occur… the shares could certainly rise over $100 per share in the short-term as the number of shares short currently exceed shares outstanding,” DOMO Capital’s Dopierala said. “So far, the short sellers have proven resilient, which leads us to believe that they are very well capitalized and will not exit until the moment that GameStop is able to show tangible results that prove they can successfully transform.”

Pretty much every part of that "Buy Sell Trade" sign is suffering recently.
Enlarge / Pretty much every part of that “Buy Sell Trade” sign is suffering recently.

While Dopierala was heavily invested in GameStop very recently, he told Ars he cashed out of his position on Thursday. That brings up the issue of when other investors might start to look at GameStop’s quickly inflating stock price and see an opportunity to cash out (which would help bring the price down to more reasonable levels).

Pachter notes that an insider Hestia investor sold 812,000 shares of GameStop last week, according to SEC filings, and suggests more investors might take their profits and run soon. “What’s [Cohen]’s strategy?” Pachter asked rhetorically. “Get the stock to $300 or get the stock to $32 and make 300 percent profit? You have to ask, does he actually think he can take it higher than this by remaining a shareholder?”

The fundamentals

While Dopierala continues to be bullish on GameStop as a whole, even he admits that the company’s transformation “may not happen as quickly as suggested by the current stock price.” Analyst consensus suggests GameStop could settle at a price of around $10 a share based on the fundamental health of the business.

“There’s nothing wrong with GameStop,” said Pachter, who has a target price of $16 for GameStop stock. “I’m absolutely convinced they’re going to thrive and survive. They don’t have net debt, so they’re not going bankrupt or anything. And with the new console launch, they’re probably going to sell a lot of consoles and be fine.”

“There’s nothing wrong with GameStop. I’m absolutely convinced they’re going to thrive and survive.”

“You would think next holiday season should be another very good year for the video game space, just considering the installed base, and people want the new consoles,” Feldman added. “[GameStop] continues to reduce its store base, increase profitability, and they’ve been doing a better job consolidating.”

There are still plenty of headwinds for a business like GameStop, of course. “The problems GameStop has—many of these problems are not going away any time soon,” Moas said. “The world has changed in the last few years as you can see with all of the shopping mall closures and the disruption Amazon and others have caused GameStop and others in the industry.”

But as long as there’s demand for new and used physical games, there will be demand for GameStop, Pachter suggested. “The people that value trade-ins value don’t want to buy digital. If you do trade games in, you look at every game you purchase as a $20 bill on trade in. People think that way. So they’re going to keep buying physical—those who care to trade them in—because there is value there. They’re not going to give away that value.”

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Valve Anti-Cheat’s “permanent” bans now have one major exception

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Enlarge / Elias “Jamppi” Olkkonen, seen here at Dreamhack’s 2019 Winter Open, may be allowed back in Valve-sponsored events despite a VAC ban.

If you know just one thing about the Valve’s Anti-Cheat system (VAC), you probably know that a ban issued through it lasts forever. As Valve’s support page lays out clearly, “VAC bans are permanent, non-negotiable, and cannot be removed by Steam Support.”

Now, apparently, there is one sizable exception to this rule, at least when it comes to esports. A post to the Counter-Strike: GO blog yesterday notes that some VAC-banned players will now be able to participate in events surrounding the game’s next Regional Major Rankings (RMR) season.

The CS:GO team notes in the post that its event guidelines were initially written around the game’s 2012 release, when “all CS:GO VAC bans were relatively recent.” Now, though, the team has decided to update those guidelines to reflect the fact that “VAC bans can now be more than eight years old.” As such, VAC bans older than five years, as well as VAC bans that pre-date a player’s first participation in a Valve-sponsored event, will no longer be taken into account when assessing RMR event eligibility.

That’s a pretty big change for a system whose defining feature is consequences that are supposed to be “permanent” and “non-negotiable.” And those other VAC consequences—including the loss of a player’s purchased game library, achievements, tradable vanity items, etc.—will still remain in place. “The only change is how they influence your eligibility to play in Valve-sponsored events,” the blog post notes.

Cheater bygones?

For years now, Valve’s zero-tolerance approach to VAC enforcement has suggested how seriously it takes evidence of cheating in the hundreds of games that use the system. One verified cheating infraction was enough to ruin your in-game credibility across Steam forever, with no exceptions even considered by Valve’s enforcement team.

When it comes to CS:GO esports, though, Valve apparently now thinks suitably old evidence of cheating should be considered as some sort of youthful indiscretion that shouldn’t be held against current players. It’s a surprisingly stark and specific carve-out for a policy that was previously inviolable.

Some CS:GO watchers suspect the rule change might be targeted to affect players like Elias “Jamppi” Olkkonen, who received a VAC ban back in 2015, when he was 14 years old. Olkkonen has claimed that the banned account in question had been lent to a friend of his at the time of the alleged cheating. He sued Valve in Finland in 2019 over that ban’s impact on his professional esports career, including its role in preventing him from signing a contract with pro team OG.

A Finnish court ruled in favor of Valve in that case last November. And in February, Olkkonen seemingly gave up on CS:GO entirely and signed on with Team Liquid as a pro-level Valorant player (though the “CSGO” name still appears in his Twitter handle). “Thank you everyone who has supported me during my past years in CS, lets start the new road in [Valorant],” he wrote at the time.

Yesterday, though, Olkkonen wrote a Twitter “thank you” for his “Officially… Unbanned” status in CS:GO. Olkkonen’s father Petri added via Twitter that Valve’s legal counsel had confirmed to him that “due to the time that has expired since the infraction happened it will no longer affect [Elias]’ eligibility to be invited to a Valve-sponsored esports event.”

Back in 2016, Ars contributor Rich Stanton wrote in depth about the crowdsourced process used by the CS:GO community to reliably identify cheaters. It’s a process that involves multiple experienced human investigators agreeing on recorded evidence of cheating, Stanton writes. It’s also a process in which investigators “presume the suspect to be innocent” and where “never being wrong is more important than always being right,” Stanton wrote.

“The surety demanded by the Overwatch system creates a small slice of cases where you’re convinced the player’s hacking, but you can’t say for sure—and if there’s any doubt, you have to let it slide,” Stanton continued.

It’s unclear whether this new CS:GO policy suggests Valve might further loosen its system of VAC consequences in the future (a Valve representative has yet to respond to a request for comment from Ars Technica). In any case, this is the first visible crack in a system that had previously served as an impenetrable shield against cheaters.

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NPD: PlayStation 5’s first 5 months are best ever for a US console launch

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Enlarge / The PS5 is bigger than Xbox Series X in more ways than one (at least, in the United States).

Sam Machkovech

While we’re still waiting on exact sales numbers for last year’s newest video game consoles, select stats have begun to emerge that, at least in the US, give a clear lead to Sony’s PlayStation 5. As it turns out, the lead is historically significant.

The NPD Group, a longtime retail analyst, has confirmed via brick-and-mortar and digital sales figures that the PlayStation 5 sold more units than any other console sold in its first five months in the US.

NPD rarely confirms exact sales figures, and stitching together an estimate of PS5 sales in the US thus far is therefore a bit tricky. In early 2018, Nintendo claimed the title of fastest selling console in US history at a mark of 10 months, by which point the company had sold “more than 4.8 million” Switch consoles.

At that time, Nintendo’s announced span of sales figures included both its March 2017 launch and its subsequent holiday 2017 period. Any more granular understanding of how many of those 4.8 million Switches sold in the US in its first five months is guesswork on our part, since Nintendo otherwise lumps Switch sales in “the Americas” for its investor relations announcements. (At the 3.5-month mark, the Switch had sold 7.81 million units throughout the entirety of “the Americas.”)

And launch numbers only tell some of a console’s success story. Even the Wii U had gangbuster sales out of the gate, with a global tally in its first two months of 3.06 million. That global number for Wii U also makes me wonder: did the PS5 sell so many consoles in the US because Sony chose to prioritize the region over Japan, Europe, and other major PlayStation territories? The NPD data doesn’t say. (The same question goes for Microsoft, whose Xbox Series X/S managed to recently top India’s console sales charts—a territory that has long been known for loving the PlayStation.)

Number hunters might note that the NPD announced last month that the PS5 was the fastest-selling console in “total dollar sales” but not units; at the time, the latter was still in Nintendo Switch’s favor as a $300 console, compared to the $500 disc-based PS5 and $400 discless PS5 model. One month later, the PS5’s leadership in the first five months of sales counts for both dollar sales and units sold.

Friday’s announcement, as posted by NPD Executive Director Mat Piscatella, did not include any sales estimates for the Xbox Series X/S hardware. When we asked, Piscatella noted that the sales of both Microsoft’s and Sony’s newest consoles “lean heavily toward the disc versions,” but he did not provide additional clarification, such as percentages.

Marching toward March sales madness

Piscatella’s latest monthly report mostly screams good news for video game hardware, software, and accessory sales. The Switch is still the number-one selling console in terms of units, both in the month of March and the entire first quarter, while the PS5 claimed the highest “hardware dollar sales” for that three-month period. Americans spent $680 million on “video game hardware” in March, beating the month’s prior high of $552 million in 2008. And year-to-date hardware spending in the states is 81 percent higher this year compared to last year in the same span of time, totaling $1.4 billion.

Beyond those numbers, Piscatella’s Twitter thread breaks down digital and traditional retail sales figures for Xbox, PlayStation, and Switch games (albeit without Nintendo’s precious eShop digital sales data for its first-party games), and it points to one other interesting note about the PlayStation 5’s apparent health: the PS5-exclusive DualSense controller is the best-selling accessory “in dollar sales” for the first three months of 2021.

Kyle Orland contributed to this report.

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Resident Evil 4 VR announced for Oculus Quest 2 as a first-person remake

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Capcom

On Thursday, Capcom announced that its megaton horror series Resident Evil will soon return to virtual reality. But instead of adding a VR mode to the upcoming Resident Evil VIII: Village, slated to launch next month, the game maker threw horror fans a curveball. The project, as it turns out, is Resident Evil 4 VR, a wildly revised port of the 2005 classic, and it appears to be an Oculus Quest 2 exclusive.

You read that correctly: Quest 2, as opposed to Rift or other PC-VR platforms. No release date or estimate has yet been confirmed.

The VR port was announced as part of the latest announcement frenzy otherwise dedicated to May 7th’s RE8, and it confirmed that Oculus Studios and Armature Studios (made up of ex-Metroid Prime developers) are leading the VR port’s production. Because of Armature’s recent ties to Oculus, in terms of releasing exclusive VR games for its Rift and Quest systems, that collaboration points to this game remaining an Oculus exclusive.

Representatives for Oculus and Facebook have so far only described the port as a product for “Quest 2,” as opposed to a more generic platform description that might hint to the “Oculus Link” system, which streams PC games to the otherwise portable Quest headset family. If Facebook wants to clarify any additional ways to play the game, we’ll have to wait for next week’s Oculus Gaming Showcase, which will premiere on Twitch and YouTube on Wednesday, April 21.

The port appears to heavily revise the original game, which launched on Nintendo GameCube in 2005 as a third-person, over-the-shoulder adventure—and one that revolutionized how the series would play for years to come. Some of that action, particularly the twitchy gun-driven combat, will likely be a solid match for the first-person view of a VR game, but RE4‘s cinematic scenes and massive bosses are another story.

Thursday’s debut trailer avoided clarifying exactly how the original game’s more ambitious moments will translate to VR. Instead, Armature and Oculus took the opportunity to show some basic combat, including a moment where the player held a knife in one hand and a pistol in the other, along with a VR-friendly inventory management screen, a puzzle that required turning a lever with hands in virtual space, and some “reload a gun using both hands” gimmickry.

Amusingly, this port serves as a reminder that the game’s original 2004 announcement came as part of a “Capcom Five” press conference of exclusive games for Nintendo’s then-struggling GameCube platform. Months later, Capcom was forced to clarify that RE4 would indeed launch on the era’s dominant PlayStation 2 after all, and it wound up being ported to roughly 4,000 other consoles in the 16 years since.

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