There was a strong bankruptcy thesis, which caused a lot of shorting of Gamestop. This actually ended up with ~140% of the floating shares being short sold.
This is fine if the company does actually go bankrupt because the shares go to 0, so no one has to worry about buying the shares they sold short.
Given the new console cycle, some aggressive cost cutting moves by management (closing a lot of stores) and a shift towards ecommerce Gamestop doesn’t look like is going to go bankrupt soon.
This is problematic because now if those short sellers want to exit their positions they have to buy shares, but as they do this will put upwards pressure on the price, which in turn may force more shorts to close. If there aren’t enough willing sellers then this can basically create a feedback loop that drives the price up massively.
This is basically what happened when VW briefly became the world’s most valuable company:
The difference with gamestop is the % of shares shorted is much higher (~13% for VW vs ~140% for Gamestop) but that one entity doesn’t control most of the shares (as Porshe did) so it’s basically a matter of when people are willing to sell (which is basically a question of how greedy WSB is).
In general I’m pretty disappointed in the growth in popularity/decline in quality of WSB over the past couple of years, especially 2020, but it’s honestly pretty funny that its relevance has grown beyond RH’s risk management department to actually having a material impact.