😅 GameStop surges 200%... and then crashes back down

Plus, Alibaba Up 10% as "Big Short" Michael Burry Bets Big on China...

🍎 GameStop Surges 200% After Roaring Kitty Meme… Before Crashing Back Down to Earth

Yup. A meme is all it took to drive an over $14 billion increase in market cap to GameStop, AMC, and other meme stocks over 2 short days before the stocks plummeted back down to below where they started.

With Gamestop and AMC both cracking the Top 5 Most Bought and the Top 5 Most Sold list on Blossom, it’s time to unpack this week’s events and talk about why you should care even if you wouldn’t touch meme stocks with a 10-foot poll…

💡 Missed last week’s edition about Buffet selling $20B in Apple stock? Check out the 90 second video summary here!

🐱 The Tweet That Started it All

After a 3 year break, ‘Roaring Kitty,’ the infamous YouTuber who triggered the GameStop saga back in 2020/21, tweeted the image below - implying he was ‘leaning back in’ to the markets (and potentially GameStop).

Roaring Kitty then went on to tweet another 109 times, mostly a variety of random movie clips, with no additional context on what he meant by the original tweet.

The tweets set off a buying frenzy, with many investors scared to miss out on another massive run-up like in 2020/21 when the stock rocketed over 10,000% from ~$1 when Roaring Kitty posted his first video to over $120 at the stock’s peak.

🐱 Roaring Kitty's Original Video Was About Fundamental Value

It’s important to note that back in 2020, Kitty wasn’t talking about the stock ‘as a meme.’ His original video is a 1-hour analysis of why he thought the stock was undervalued across fundamental and technical indicators (the stock was trading at a $260M market cap at the time, less than 5% of today’s market cap of $6.8B).

🎢 Uppppppp… and down

Unfortunately, for many who bought in this time, the gains were short-lived - only lasting two days. Here’s how the week shaped out:

  • Monday: +74.4%

  • Tuesday: +60.1%

  • Wednesday: -18.87%

  • Thursday: -30.04%

  • Friday: -19.73%

Overall, GameStop ended the week down 15.55% from its market open price on Monday.

🛣️ A Trip Back Down Memory Lane

The GameStop saga was one of the most memorable hallmarks of the 2020/21 bull run, with an awesome feature-length movie ‘Dumb Money’ made about the story.

If you haven’t watched it yet, definitely check out Dumb Money! It’s a really fun watch 😊

At the center of it all was the concept of a ‘short squeeze,’ which is a bit complex, so let’s break it down in the context of the 2020/21 GameStop saga:

  • 📉 When an investor (or hedge fund) wants to ‘bet against’ a stock, they short it, meaning they borrow a stock from someone and sell it on the open market, with the goal to buy it back later for a lower price.

  • 😬 The problem with shorting is that you can have potentially infinite losses. If the stock soars, and you have to ‘cover your short,’ you have no choice but to buy it for way more than you sold it for.

  • 😳 At the peak, GME ‘short interest’ was 140%, meaning there were more shares being shorted than even existed.

  • 🚀 When the stock started skyrocketing (driven by Reddit, Roaring Kitty, and the general meme stock craze), hedge funds were forced to cover their shorts, meaning they had to buy the stock at insane prices. This buying just drove the stock up even further since there was more demand for the stock than supply.

  • 🛑 This massive ‘short squeeze’ took place January 2021, and would have likely continued if brokers (most notably Robinhood) hadn’t suspended trading - preventing the stock from being bought (but still allowing sells 👀)

  • 🚫 Despite the trading freeze, hedge funds lost nearly $20B in January alone, and the once-successful Melvin Capital had to shut down completely.

😱 Hedge Funds Get Burned… Again

While many retail investors lost big this week, ironically, the biggest losers were again the hedge funds who apparently didn’t learn their lesson the first time around.

This time, short sellers ‘lost $2B’ over Monday and Tuesday, assuming they covered their shorts. Some certainly did, with a note from Goldman Sachs saying that just before the rally faded, hedge funds dropped positions on the most actively shorted stocks.

For investors still praying for a 2021-style short squeeze, keep in mind that the short position in GameStop is only 24% of shares (compared to 140% from its 2021 peak).

 🚨 A Signal of Market Froth?

So if you don’t give a sh*t about meme stocks, why should you care?

Well, according to Bloomberg and Wall Street Journal, this week’s meme-stock pop is a sign that the US equity markets are “frothy and potentially peaking,” and with the S&P hitting new all-time highs this week, perhaps they’re right.

“We wouldn’t have seen a surge in meme stocks like this unless equities were already somewhat exuberant”

Steve Sosnich, Chief Strategist at Interactive Brokers LLC

But not everyone agrees, and some are quick to point out that just because the market is hitting all-time highs doesn’t mean it’s peaked.

In fact, according to Investment Bank UBS, the S&P has traded within 5% of a record high over 60% of the time in the past 60 years, and since 1960, the market has posted an average 11.7% return in the 12 months following a record.

“All-time highs often generate investor concern that markets have peaked. Such worries are not supported by history”

Mark Haefele, chief investment officer at UBS Global Wealth Management

To conclude, two quick thoughts:

  • 🎰 Investing in GameStop is basically gambling at this point, so unless you’d be willing to put the same amount of money on the roulette table, you probably shouldn’t be investing it in GME/AMC.

  • 💸 If you don’t want to worry about timing the market, one common approach is to ‘dollar cost average’ (essentially invest a fixed amount every month without worrying about stock price).

😢 Not So Fun fact: 57% of Blossom users who exited their GameStop positions sold at a loss, while 43% sold for a gain.

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🇨🇳 Alibaba Up 10% as “Big Short” Investor Michael Burry Ditches Amazon and Buys Baba

With nearly 1,000 holders, Alibaba is by far the most-held Chinese stock on Blossom, so many of you were likely happy to see the stock jump 10% this week.

But with the e-commerce giant still down over 70% from all-time highs, let’s take a look at what’s going on, and whether Alibaba is a buy…

😢 First, An Earnings Miss

Ironically, despite the stock bump, Alibaba actually missed earnings on Tuesday, causing the stock to fall 4% before bouncing back to end the week in the green. Here’s the earnings summary:

  • Revenue: Up 7% to $222B (vs expected $220B)

  •  Net Income: Down 96% to $127M

  •  Non-GAAP Net Income: Down 11% to $3.4B

Ok, WHOA, a 96% drop in net income? Shouldn’t that tank the stock completely?

Well, Alibaba reported that this was due to a net loss on the company's investments in other publically traded companies, and that is why it reported the non-GAAP net income as well.

Alibaba explains the 11% drop in non-GAAP net income is mostly due to investments to improve their e-commerce business.

💰 High-Profile Investors Betting Big

One of the drivers of Alibaba’s boost was a big bet from high-profile investor Michael Burry (made famous by “The Big Short”) and glowing support from Citron Research (a research company once known for shorting Chinese stocks).

🇨🇳 Burry Moves to Team China

Burry not only moved Chinese stocks JD and Alibaba to his #1 and #2 holdings, he also completely sold off Amazon and Alphabet. While Burry didn’t comment on the changes, he’s certainly voting with his dollars.

Chinese stocks ($JD, $BABA, $BIDU) now represent over 22% of Burry’s portfolio (which you can view here).

📊 Another Tweet, This Time Not from a Kitty

On the theme of ‘tweets moving markets,’ many believe a tweet from research firm Citron Research contributed to Alibaba’s rebound on Thursday when they tweeted that the company should ‘cruise past $100’:

Alibaba ($BABA) gaining momentum should cruise past $100. They’re poised to emulate the success of Amazon ($AMZN) and Microsoft ($MSFT) in China.

- Citron Research

🤔 Does That Mean You Should Buy Too?

With many high-profile investors piling in, you may be wondering if you should buy too. Well, here are some of the strongest positives:

  • ☁️ Alibaba’s Cloud Intelligence grew only 3%, but Alibaba says they expect this to grow by double digits by the end of the year. Adjusted EBITDA for this segment grew 45% YoY.

  • 🤖 AI-related revenue (within the Cloud Intelligence) is recording triple-digit growth year-over-year

  • 💰 According to Daniel Pronk, Alibaba is trading for an enterprise value to free cash flow ratio of ~6.15x, meaning Alibaba could theoretically return 16.26% per year in dividends to investors just from its current cash flows (not even considering future growth).

💡 For a complete Alibaba earnings breakdown, check out Daniel Pronk’s video here. According to Blossom, Pronk holds 3% of his portfolio in $BABA.

But Alibaba and the Chinese market are not without troubles:

Altogether, Alibaba (and Chinese stocks in general) look cheap on paper, but as Barron points out, “investors making this bullish bet have been let down again and again.”

Personally, I’m less pessimistic, and you may see me placing a Baba buy after the long weekend… 👀

🎙️ Top Discussions this Week

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