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Investment firms back down after Reddit thread sends GameStop shares soaring

PEMBROKE PINES, FLORIDA - JULY 21: An exterior view of a GameStop store on July 21, 2020 in Pembroke Pines, Florida. GameStop is among the latest retailers requiring masks to be worn in their stores to control the spread of the coronavirus (COVID-19)

A David and Goliath saga is unfolding in financial markets over the stock price of struggling retail chain GameStop. On Wednesday, Goliath walked away from the battle. Two Goliaths, actually.

A pair of professional investment firms that placed big bets that money-losing video game retailer GameStop's stock will crash have essentially admitted defeat. The victor, for now at least, is a volunteer army of smaller investors who have been rallying on Reddit and elsewhere online to support GameStop's stock and beat back the professionals.

GameStop's stock surged as high as $380 Wednesday morning, after sitting below $18 just a few weeks ago.

One of the two major investors that surrendered, Citron Research, acknowledged Wednesday in a YouTube video that it unwound the majority of its bet that GameStop stock would fall. Andrew Left, who runs Citron, said it took "a loss, 100%" to do so, but that does not change his view that GameStop's stock will eventually fall sharply.

"We move on. Nothing has changed with GameStop except the stock price," Left said. He also said he "has respect for the market," which can temporarily run stock prices up higher than critics think they should go.

Melvin Capital is also exiting GameStop, with manager Gabe Plotkin telling CNBC that the hedge fund was taking a significant loss. He denied rumors that the hedge fund will fail.

The size of the losses taken by Citron and Melvin are unknown.

GameStop's stock has long been the target of investors betting that its stock will fall as it struggles in an industry increasingly going online. The retailer lost $1.6 billion over the last 12 quarters, and its stock fell for six straight years before rebounding in 2020.

That pushed investors to sell GameStop's stock short. Essentially, these short sellers borrowed shares of GameStop and sold them in hopes of buying them back later at a lower price and pocketing the difference. GameStop is one of the most shorted stocks on Wall Street.

But its stock began rising sharply earlier this month after a co-founder of Chewy, the online retailer of pet supplies, joined the company's board. The thought is that he could help in the company's digital transformation.

At the same time, smaller investors gathering on social media have been exhorting each other to keep pushing the stock higher. There is no overriding reason why GameStop has attracted those smaller investors, but there is a distinct component of revenge against Wall Street in communications online.

"The hedge fund owners are crying as a result of us," one user wrote on a Reddit discussion about GameStop stock. "We have the power in this situation, not anyone else as long as we stay strong!"

Almost immediately after, another user shouted in all capital letters, "BUY AND HOLD WE WILL BE VICTORIOUS."

The battle has created big losses for major Wall Street players who shorted the stock. As GameStop's stock soared and some of the critics got out of their bets, they had to buy GameStop shares to do so. That can accelerate gains even more, creating a feedback loop. As of Tuesday, the losses had already topped $5 billion in 2021, according to S3 Partners.

Much of professional Wall Street remains pessimistic that GameStop's stock can hold onto its moonshot gains.

Analysts at BofA Global Research raised their price target for GameStop on Wednesday from $1.60, all the way up to $10. It was at $362 in midday trading.

Nevertheless, the phenomenon does not appear to be fading.

AMC Entertainment Holdings Inc., the theater chain that has been ravaged by the pandemic, posted a quarterly loss this month exceeding $900 million.

It appears, however, that AMC has become the next battleground in the fight between smaller, retail investors, and Wall Street.

Shares of AMC spiked 260% when trading began Wednesday and #SaveAMC is trending on Twitter.