Why did Michael Burry lower his stake in GameStop?

GameStock, the popular gaming retailer, saw investment from the famous investor Michael James Burry, but what made him lower his stake in the retail company soon after investing in it?

Who is Michael Burry?

A prominent name among the investors, Michael James Burry, is an American Investor, hedge fund manager, and Physician. Burry founded the hedge fund Scion Capital, which he started in 2004, but closed it for focusing on his personal investments in 2008.

He is best known for his prediction about the subprime mortgage crisis of 2007-2010 and was the sole investor to predict and profit from it.

Michael Burry’s Career:

A former Stanford Hospital Neurology and Pathology Resident turned out to be an inspiring investor. 

He left his medical career to start his hedge fund. Burry built a reputation as a successful investor focused on value investing. His Stock picks attracted companies like White Mountains Insurance Group, Vanguard, etc., and investors like Joel Greenblatt.

He often managed to gain returns from the fall in S&P 500 while Scion capital was always up in such situations. Burry then started to focus on the subprime market in the year 2005, which led to him accurately predicting the collapse of the real estate bubble by 2007.

In 2013, Burry reopened his Hedge Fund, which was now called Scion Asset Management. And he started to focus on investing in water, gold, and farmland. In 2019, the 13F report showed Burry to hold numerous large-cap stocks and around $103,528,000 13F assets under management. Scion Fund’s most significant investments in 2020 were in Alphabet and Facebook(now Meta).

His investment strategies have been popular so much that a book is written, and a movie has been made on him by the name The Big Short.

What is GameStop?

GameStop Corporation is a trendy name among gaming retailers worldwide. It is an American video game, consumer electronics, and gaming merchandise retailer and has stores in significant countries like the United States, Canada, New Zealand, Europe, etc. 

Although the company is currently witnessing a decline, it is one of the largest gaming retailers. It was founded in 1984 by Daniel DeMatteo, Richard Fontaine, and Leonard Riggio. 

But due to the shift in video games sales to online shopping and downloads and the failed investments by GameStops in smartphone retail. Though the company was recently in the limelight in 2021 because of its volatility of the stock price and GameStop short squeeze, due to which its stock prices surged highly.

GameStop acquired EB Games in 2005 and Rhino Video Games in 2007, which helped the company expand its stores through significant countries. The company also founded MovieStop in 2004, a store focused on new and used movies. Similarly, it has acquired various companies, retailers, and websites which have somehow contributed to the successful career span of GameStop. 

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Apart from the retail stores, the company also publishes and owns Game Informer, a video game magazine. And also run an e-commerce retro gaming and pop culture marketplace in Australia called Zing Marketplace, which is focused on C2C sales.

But the emergence of downloadable games on Xbox, Play Stations, etc., did not prove to be a good sign for the company’s performance, which started to decline from 2016-17. The company witnessed a drop in sales by 16.4% during the 2016 holiday season leading to a 

Fall in Stock

In 2018, Gamestop announced the sale of its company and confirmed the talks with a private equity firm called Sycamore partners. But later, it disclosed it had stopped looking for a potential buyer. After this announcement, the company witnessed a huge loss, which was a fourteen-year low of shares dropping by 27%.

But the company had made several efforts to put itself back in a good position. In July 2019, it collaborated with a design first R/GA to introduce ways for customers to try gaming before purchasing. 

In January 2021, GameStop saw a 1500% increase in its share price due to a short squeeze. This was primarily attributed to an effort by the Reddit community Wallstreetbets. The subreddit focused on stocks with high market risks.

In May 2021, GameStop announced that it is working on a Non-Fungible Token (NFT) platform, developing a token based on the Ethereum blockchain. GameStop has jumped into the NFTs sector, collaborating with Immutable X, a Layer 2 blockchain, to develop its marketplace and cryptocurrency.

How is Michael Burry related to GameStop?

Michael Burry is one of the significant investors on GameStop. Burry bought a stake in the GameStop company because he determined the Stock was undervalued. Securities and Exchange Commission’s filings show that Burry’s Scion Asset Management firm owned about $7 million worth of GameStock stock in late 2018 but sold it in the second quarter of 2019. 

Michel Burry on GameStop reinvested in the following quarter, revealing 3 million shares at a $17 million valuation. Scion Capital, the investment firm of Burry, sent a letter to the executives of GameStop, trying to persuade them to engage in a $238 million stock buyback. And also questioned the shareholder’s faith in the current management. 

Because GameStop has $540 million in cash at the last count, Burry predicted that if it buys back approximately two-thirds of its outstanding Stock, it would still be left with plenty of money to invest in the business.  

Burry stated several times about the company and also called for four of its non-executive directors to resign. After a lot of discussions and news, Michael Burry finally lowered his stake in GameStop in May 2020.

But his GameStop bets and calls for buybacks might have made way for the short squeeze and the company witnessing an increase in share price. However, Burry didn’t have any regret taking down his stake while this short squeeze happened.

But it is to look forward to the American Investor’s future decisions. And also, how GameStop would evolve to be in the NFTs sector and the crypto industry,