Michal Burry and GameStop: Missed Opportunities

Introduction

Michael Burry, the renowned hedge fund investor who accurately predicted the subprime mortgage crisis and whose story was immortalized in the movie “The Big Short,” found himself at the center of another financial maelstrom with GameStop. However, this time, the outcome was a bit different. Burry’s early investment in GameStop provided a glimpse of potential wealth, but the subsequent Reddit-fueled meme stock phenomenon ultimately saw him exit the trade before its meteoric rise.

A Strategic Entry

Burry’s initial foray into GameStop dates back to mid – 2019 when he saw an opportunity for the struggling video game retailer. He purchased a substantial stake, making him one of the company’s significant shareholders (approximately 2,750,000 shares, or about 3.05%, of GameStop, Inc.). At the time, GameStop was plagued by declining sales, a heavy short interest, and pessimism in the market. Burry saw a chance for the company to conduct a substantial share buyback, effectively reducing the number of outstanding shares and potentially squeezing the short sellers.

An Early Exit

Michael Burry sold his entire stake in GameStop during late 2020. This decision proved fateful, as it meant he missed out on the astounding rally that followed, driven by an army of retail investors on the WallStreetBets subreddit. GameStop’s stock price soared to unimaginable heights, reaching a peak of $483 per share in January 2021, representing a surge of nearly 2,000% from his exit point.

A Billion-Dollar Missed Opportunity

The Reddit-fueled surge in GameStop’s share price reached a point where Burry’s maximum holding, at its peak, could have been worth over $1.5 billion. His early investments and astute analysis could have translated into an astonishing financial windfall. However, by selling his GameStop holdings early, Burry likely missed out on this historic opportunity. Despite missing out on the huge gains that followed, he does not appear to be left empty-handed, as his early exit could have still netted him around $100 million.

A Reflection of Market Dynamics

The GameStop saga reflects the evolving dynamics of financial markets in the digital age. The democratization of information and the rise of social media have enabled retail investors to band together and challenge traditional market conventions. Burry’s early involvement in GameStop, along with his strategic recommendations, added an intriguing layer to the unfolding drama.

Conclusion

The GameStop story is a remarkable chapter in the ever-evolving landscape of financial markets. Michael Burry’s initial entry and early exit from GameStop serves as a testament to the unpredictability of the stock market and the influence of retail investors. While he might have missed out on a billion-dollar opportunity, the GameStop phenomenon underlines the power of collective action and the profound impact of online communities on the financial world. Michael Burry’s story with GameStop is just one piece of this extraordinary narrative, where Wall Street meets Main Street in a battle for control, influence, and financial gain.


Michael Burry's Letter to GameStop Management

August 16, 2019

Dear Members of the Board,

Scion Asset Management, LLC and its affiliates (“Scion”) own approximately 2,750,000 shares, or about 3.05%, of GameStop, Inc. (“GameStop”) common stock.

As mentioned in our previous letter to the board, we have concerns regarding capital management at GameStop. Given recent GameStop common stock prices under $4 per share, we must re-state that GameStop complete the remaining $237,600,000 share repurchase at once and with urgency.

Given the market capitalization of GameStop at $290 million at the close on August 15th, completing the authorization would retire over 80% of GameStop’s outstanding shares. Depending on the timing and quality of execution, such a repurchase would increase earnings per share dramatically – far more than any other possible action on a per share basis.

The numbers are striking and demand action. We estimate that GameStop now has in excess of $480 million of cash, more than enough to complete the share repurchase authorization and still invest in the business and pay down debt.

Through August 15th, a total of 11 trading days, 50,399,534 shares have traded. At this rate, for the month of August and for the third month in a row, the number of shares traded will exceed the total number of shares outstanding. Because of such high volume, we maintain that GameStop could pull off perhaps the most consequential and shareholder-friendly buyback in stock market history with elegance and stealth.

Shareholders staring at all-time lows in GameStop stock see little evidence that GameStop has effectively leveraged its elite position in the gaming universe as the new paradigm came into clear view over the last five years.

The unfortunate reality is that Amazon, not GameStop, bought Twitch in 2014. Instead, in 2014, GameStop started buying wireless store assets. And in 2017, Amazon, not GameStop, bought GameSparks – while less than a year ago GameStop reversed course and sold its wireless store assets. Shareholders are right to worry.

We expect GameStop’s business will perk up a bit during 2020 and 2021 as the new console cycle, with associated software updates and introductions, finally gets underway. But what is happening now in the stock is about more than late cycle doldrums or even the streaming paradigm – shareholders do not have faith in current management, and have not been inspired by new leadership policies.

Notably, as of July 31st, 2019, Bloomberg reports short interest in GameStop stock at 57,226,706 shares – this is about 63% of the 90,268,940 outstanding GameStop shares at last report.

We submit that when share prices are at or near all-time lows and more than 60% of the shares are shorted despite cash levels much higher than the current market capitalization, lack of faith in management’s capital allocation is the default conclusion.

All of this creates the opportunity to enter 2020 with a dramatically reduced share count along with multi-fold greater impact per share for every single other achievement of management. Consider as just one example that if the turnaround is successful, and if GameStop were able to shrink its shares outstanding to 30 million through the share repurchase, the $157 million dividend that was just eliminated would pay out around $5.25 per share.

The Board deemed up to $6.00 per share a good price for a buyback less than two months ago, and the price of the stock today is nearly half that amount.

We again advise the Board to represent shareholders well, and to ensure the execution of the remaining repurchase authorization in full.

Sincerely,

Dr. Michael J. Burry

Source:  https://www.businesswire.com/news/home/20190819005633/en/Scion-Asset-Management-Urges-GameStop-Buy-238 ; https://twitter.com/michaeljburry/ ; https://Michael-Burry.com/Michael-Burry/