Michael Burry, renowned for his early prediction of the 2008 housing bubble and subsequent financial crisis—as depicted in the movie “The Big Short”—has been lauded for his ability to identify undervalued assets or mispriced risks. One of his most talked-about moves in recent years was his investment in GameStop, a brick-and-mortar video game retailer. But how exactly did Burry capitalize on this beleaguered company, and what was his rationale? Let’s delve into it.
1. Recognizing Value in the Overlooked:
While many viewed GameStop as a failing retail business in an increasingly digital age, Burry saw value where others didn’t. He believed the company’s balance sheet was strong, and that it was undervalued. GameStop had no debt due until 2021, and the cash flow was strong enough to carry the company through until then.
2. The Physical vs. Digital Debate:
Although digital downloads for video games were on the rise, Burry argued that the transition from physical to digital wouldn’t eliminate the demand for physical video games overnight. He believed that there was still a substantial market share that preferred physical copies, particularly with next-gen consoles on the horizon, which would have disk drives.
3. Short Interest and the Squeeze:
One of the pivotal moments for GameStop’s stock was the short squeeze. By early 2021, GameStop became one of the most shorted stocks on the U.S. market. With more shares being shorted than were available to trade, this set up a potentially explosive scenario where short sellers would have to buy shares to cover their positions if the price began to rise, causing the price to increase even more—a phenomenon known as a “short squeeze.” While Burry’s position was established long before the Reddit-driven rally that brought attention to GameStop’s short interest, the situation undoubtedly influenced the stock’s dramatic rise in January 2021.
4. Exit at the Right Time:
Timing the market is tricky, but in the case of GameStop, Burry seemed to have done it correctly. Before the massive surge in GameStop’s share price in early 2021, driven largely by retail investors from forums like r/wallstreetbets on Reddit, Michael Burry’s Scion Asset Management had already sold its GameStop stake, netting a significant profit.
Michael Burry’s investment in GameStop serves as another testament to his contrarian approach to investing. While Burry recognized the inherent value in GameStop when many discounted it, he also knew when to exit. Although he did not directly profit from the short squeeze, his ability to identify overlooked opportunities and act on them continues to solidify his reputation in the investment world.