GameStop's stock price cratered on Tuesday, falling 60% to $90 a share. The drop signaled that the popular WallStreetBets Reddit stock market discussion board — a major force behind last week's spectacular rally in the troubled video game retailer's shares and others'— may be losing its magic to move the market.
The GameStop tumble followed a large reduction in short interest on the stock, which measures how many of the company's shares have been borrowed to sell. Many had pointed to that previously high short interest, and the fact that hedge funds and others betting against the video game retailer had been squeezed, as a reason GameStop's shares had soared.
"These things can last longer than people expect, but when they unwind, they can unwind pretty fast," said Ross Mayfield, investment strategist at Baird. "When it's complete speculation mania and gambling, someone is going to be left holding the bag."
The drop, which followed a sharp decline in GameStop shares on Monday, may also result in significant losses for some of the individual investors who had ridden the positive stock market suggestions posted on WallStreetBets. The forum has soared in popularity in the past week, swelling to 8 million members. GameStop's shares hit an all-time high of $483 on Thursday.
Since then, GameStop's stock price has fallen 81% in less than a week. That's erased nearly $29 billion in the company's stock-market value, which at its height last week had a market capitalization of $35 billion. On Tuesday that market value sank to $6.3 billion.
The share prices of other companies that have gotten boosterish mentions in WallStreetBets have suffered steep drops as well. Shares of movie theater chain AMC Entertainment were also down 40% on Tuesday, to just under $8 each. That stock had been as high as $20 last week. BlackBerry's shares, which had been as high as $28 last week, fell 21% on Tuesday to $11.50, while Koss slid 43%.
The acting chairwoman of the U.S. Securities and Exchange Commission, Allison Herren Lee, told NPR on Monday that the stock market regulator is looking into different aspects of the sudden rise in GameStop shares, including whether brokers acted appropriately and whether there had been any market manipulation. She also warned against companies trying to raise money by selling shares at prices that seemed to be inflated by social media driven traders and were not sustainable.
CBS MoneyWatch reported on Monday that the moderators of the WallStreetBets discussion board had recently detected a "large amount" of bot activity in the stock-recommendation content being posted to its group.
Naked Brand Group, which sells intimate apparel for both men and woman, on Monday announced it had sold more than 29 million shares in a follow-on offering at $1.70 each, raising $50 million for the company. The company, which is based in Auckland, New Zealand, is in the process of closing all of its stores in favor of online sales.
Naked Brand's shares had traded for as little as 7 cents each as recently as November. In its offering document, filed with the SEC, the company said its stock price had experienced "extreme volatility" in recent weeks. It said the price swings appeared to be driven by social media chatter as well as "short interest" in the company, as well as other factors.
On Tuesday, shares of Naked Brand fell to 91 cents each, a 45% drop from Monday's offering price. A spokesman for Naked Brand did not return a request from CBS MoneyWatch for comment.
—The Associated Press contributed to this report.
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