The GameStop (NYSE:GME) share price continues to defy expectations. Over the last 12 months, even with the high level of volatility, the stock is up nearly 4,600%. And just last week, it continued its upward trajectory, jumping by a further 10% in the first hours of trading on Tuesday. What caused this recent surge? And could it be that GameStop is a worthwhile long-term investment for my portfolio? Let’s take a closer look.
The bullish GameStop (GME) share price movement
The pandemic decimated a large portion of the retail industry. And for GameStop, it proved to be a complete catastrophe. But the video games retailer was in a struggling position long before Covid-19 entered the picture. After all, with most gamers buying and downloading their games digitally, the need for GameStop’s physical stores has been dwindling.
In an attempt to save the business, Ryan Cohen, the co-founder of the online pet food business Chewy, has been brought on as the new chairman of the board. His vision is to transform the company into the Amazon of gaming. Needless to say, that’s quite a challenge. Although it’s worth noting that he managed to pull off something similar for Chewy. Consequently, investors seem to have faith in this new leadership.
If Cohen succeeds, then the currently overvalued GME share price may actually be justified. And now that the firm has just finished raising over $1.1bn through the sale of five million shares, its balance sheet has been flooded with cash to fund this enterprise. That appears to be why the GME share price shot up last week.
The financials
The last time I looked at this business, the financials were quite concerning. Since then, the company’s first-quarter earnings report for 2021 has been published. And there are some encouraging signs of a potential turnaround.
Using previously raised capital from shareholders and proceeds from closing stores, long-term debt has been completely eliminated. Meanwhile, this latest round of funding has significantly improved the liquidity position of the business. In other words, GameStop shouldn’t have much trouble meeting its short-term obligations in the near future. And what’s more, sales for the quarter actually saw a 25% increase.
Overall, the business seems to be in a much better state than a few months ago. However, as promising as this is, the risks remain exceptionally high, in my opinion.
The risks that lie ahead
Investors have given a lot of capital to the GameStop management team with the expectation that it can deliver a turnaround. But whether this can be achieved has yet to be seen. It’s worth remembering that the online video games retail market is highly competitive. And GameStop’s brand may not be enough to grant any significant pricing power.
The recently acquired $1.1bn gives the company some breathing room and some much-needed funding for internal investment. But suppose the firm fails in its goals of transforming into a profitable digital-first multichannel game retailer. In that case, I would expect the GME share price to plummet just as quickly as it increased. After all, the stock still looks like it’s being driven by speculation rather than underlying fundamentals. And personally, that’s not the type of investment I want in my portfolio.