Hey everyone, Ross Cameron here! Roaring Kitty, also known as Keith Gill, has become a legend in the day trading community. His journey with GameStop (GME) began in 2019 with an initial investment of roughly $50,000. Over time, he turned this investment into nearly $1 billion in unrealized gains. Let’s dive into his extraordinary story, his strategy, and where things stand today.
Roaring Kitty’s Initial Investment in GameStop
Roaring Kitty made his first post on Reddit under the username “DeepF******Value” in 2019. His initial position was in GameStop $8 strike price calls with various expirations. This position alone took his account value up to $133,000. This was the beginning of an incredible journey. By September 2019, his account stood at $117,000. Two months later, in November, the account had surged to $230,000, a 400% increase. Even amid volatility, with his account dropping to $83,000 at one point, Roaring Kitty maintained his confidence and stayed the course.
The Investment Thesis
Roaring Kitty’s thesis for investing in GameStop was built on three key points:
- The Risk of Digitalization is Overblown – Despite the push towards digital gaming, demand for physical games was still strong.
- Bearish Sentiment is Overly Negative – He believed the market was overly pessimistic about GameStop’s future.
- GameStop’s Value is Overlooked – He thought the stock was undervalued relative to its book value and potential digital transition.
Detailed Breakdown of Roaring Kitty’s Thesis
Digitalization Risk Overblown
Roaring Kitty argued that the transition to digital gaming was slower than expected. Physical discs still made up a significant portion of sales. He pointed out the technical and infrastructure limitations that would keep some consumers buying physical games for the foreseeable future.
Overly Bearish Sentiment
Many investors were extremely bearish on GameStop, predicting its imminent obsolescence. However, Roaring Kitty observed that some of these assumptions were based on misconceptions. For example, not everyone had high-speed internet capable of handling large game downloads. The short interest on GameStop stock even peaked at an unprecedented 140%.
Overlooked Value
Roaring Kitty believed GameStop was a classic value investment. The company’s book value was higher than its market cap, and the fundamentals had improved with new management. He highlighted that notable investors like Michael Burry and Ryan Cohen had also taken significant stakes in the company, boosting his confidence.
Roaring Kitty’s YouTube Presence
In July 2020, Roaring Kitty started posting videos on YouTube, sharing his trading strategy and investment philosophy. His in-depth technical analysis and valuation methods attracted a lot of attention. Naturally, GameStop was a significant focus. Roaring Kitty’s bet on GameStop centered on three main points:
- Equity Worth More Than $250 Million – Based on his analysis, he believed the company’s market cap should be higher than its current value.
- Legacy Business Value Between $500 Million to $1.5 Billion – He thought the business was undervalued, given its revenue and potential.
- Greater Than 0% Chance of Successful Business Transition – He believed that the market was incorrectly pricing GameStop as a zero-chance bet on digital transition.
GameStop’s Financial Situation in 2020
GameStop had an annual revenue of $6 billion but was trading at only 4% of revenues. It also had 42 million rewards members, 15 million of whom were active shoppers. The stock price surged to $500 per share during the height of the frenzy, leading to a 4:1 stock split. This split-adjusted all-time high is now considered around $120. This meteoric rise was due to a massive short squeeze, which wiped out firms like Melvin Capital. His account value increased significantly over time, hitting milestones like $3 million, $7 million, $22 million, and peaking around $50 million. These gains were fueled by the short squeeze and market enthusiasm.
GameStop’s Current Business Performance
Fast forward to today, GameStop’s revenue has seen a decline, down 29% year-over-year in Q1. Despite this, Roaring Kitty remains hopeful about the company’s transition to the digital space, led by Ryan Cohen, the new CEO. However, this transition hasn’t been entirely successful yet. GameStop raised around $1.5 billion through two equity offerings in 2021, which improved their cash position but diluted the value of the stock for existing investors.
Recent Update from Roaring Kitty
In June 2023, Roaring Kitty revealed a huge $210 million account value, with a 5 million share stake at $21 per share. This position shows his continued conviction in GameStop, even though the price is quite high, adjusted for the stock split. While Roaring Kitty’s 2020 thesis was spot-on in many respects, some elements like the digital transition are still uncertain. GameStop is now trading at 20% of its revenues, a stark contrast to the 4% of revenues it traded at in 2020. Revenue and margins have also been declining, raising concerns about the company’s future. The declining revenue and free cash flow, along with deteriorating gross margins, pose significant challenges for GameStop. The company’s valuation at current price levels doesn’t appear to be the deep value position it once was.
Current Status of GameStop
With a float that has grown from 50 million to 425 million shares, the likelihood of another epic short squeeze seems minimal. While the short interest isn’t high enough to support such a squeeze, the possibility of synthetic short positions through equity swaps remains. The stock is currently holding at around $24-$25, far from its previous highs. Roaring Kitty’s large position indicates his confidence, but it remains to be seen how this will play out.
Final Thoughts
Roaring Kitty’s journey with GameStop is nothing short of remarkable. From a $50,000 initial investment to nearly a billion in unrealized gains, his story is an inspiration to day traders everywhere. While there are future challenges, Roaring Kitty’s confidence in GameStop and its potential remains evident. Stay tuned for more updates as this story continues to unfold. Thanks for reading, and see you in the next one!
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