GameStop (NYSE: GME) was a top gainer in the US markets yesterday, rising 10% to close at $220.40. It is one of the most volatile US stocks; in January, experiencing a short squeeze at the mercy of the Reddit army, it swung from lows of $17 to highs of over $500. Six months later, the Reddit stock’s price remains unpredictable.
So why is GameStop soaring?
The company has made headlines for taking advantage of its giddy share rally, raising $1,126,000,000 from the sale of 5,000,000 common shares. This is in addition to the $500,000,000 raised in April.
GameStop is now in very strong financial position. With long-term debt paid off, and a war chest of almost $2,000,000,000, there is a strong argument to be made that GameStop is now a serious investment opportunity. In GameStop’s latest earnings report, sales had risen 25% in the first fiscal quarter, and are expected to continue to rise.
GameStop’s new chairman Ryan Cohen, the co-founder and former CEO of Chewy, grew the largest pet supplies business in the USA. Cohen was told that there was no money in pet supplies. Yet a year after he stood down, the company’s IPO valued itself at $8,700,000,000. If nothing else, he has a track record of financial success in an adverse market.
Cohen has recruited top level executives from Amazon and Google including Elliott Wilke, Matt Furlong, and Mike Recupero. Cohen plans to turn GameStop into the “Amazon of gaming,” pivoting the business towards a profitable e-commerce model.
Part of this plan is to create GameStop’s own blockchain of NFTs (non-fungible tokens), and I speculate this could be used to create a third-generation online gaming experience.
The Reddit army
Then there’s the near fanatical loyalty of the Reddit army composed of millions of traders from the sub-reddits r/Wall Street Bets, r/GME, and r/Super Stonk.
Traders are holding GME shares with ‘diamond hands,’ and not selling regardless of where the price goes. It is worth noting that many are emotionally invested into the company that helped form their childhood.
This herd mentality has ultimately saved the Reddit stock from collapse. In addition, short interest is over 20% of the current float, and many Redditors hope for another January style short squeeze.
There are risks with investing into GameStop at this price point. The stock is extremely volatile, and many hedge funds expect it to fall soon. The SEC recently announced an investigation into its share activity, which could be a worrying indicator.
A tale of two companies?
GameStop is overvalued based on past metrics. However, if Ryan Cohen converts GameStop into the Amazon of gaming, this price could look cheap for the Reddit stock. He has succeeded before with Chewy.
I will be buying a few shares as a small percentage of my portfolio. I believe that this is a high-risk trade that could deliver large returns in the long term. However, this level of risk will be contained to only a small proportion of my portfolio, and if I were a risk-adverse investor then I’d avoid GameStop altogether. To read more about the risks, please read the opinion of my Foolish colleague, James McCombie.