The GameStop (NYSE: GME) share price has taken Wall Street by storm over the past year. The shares skyrocketed from just $20 to almost $350 in January. The battle between hedge funds and retail investors was well documented on social media (and I’ve explained it below too), creating one of the best news stories on the stock market.
Currently sitting at just under 200p, the stock seems to have held onto some of its momentum. However, does GameStop have the capacity to push higher in September? Let’s take a closer look.
The story so far
The GameStop share price shot up drastically after being ‘short squeezed’. This typically occurs when a stock is heavily shorted by a large hedge fund, which is betting the price will go down. Retail investors then get behind the share, driving its price up – the opposite of what hedge funds are expecting. Hedge funds pay interest on their shorted shares, and when the share price increases, so does the interest. Once this reached an unsustainable level (when share price increases rapidly), hedge funds buy back their shares, and the stock surges upwards even more.
For GameStop, this plan was cultivated on the online platform Reddit and helped drive the share price up over 1,800%. The GameStop share price has since been extremely volatile, often fluctuating in double-digit percentages daily.
GameStop share price: next steps
There are 76m Gamestop shares outstanding and 63m of these are floated on the exchange for investors to trade. Some 12% of these floated shares (7.5m) are held in short positions. Therefore theoretically, GameStop could be squeezed again. This is the only way I see GameStop shooting up further in the short term.
Looking at company fundamentals paints a bleak picture for the firm. Since 2018, over 1,000 stores have been shut down in an effort to drive up poor margins. The company’s Q2 2021 earnings report highlighted a 25% increase in sales of $1.3bn compared to Q2 2020. However, this figure is rather misleading considering most stores were shut during Q2 2020. Comparing this to Q1 2019, sales were actually down almost 18%.
In addition to this, I feel the GameStop share price is heavily overvalued, trading at almost 16x book value. Considering the firm is still loss-making, the current share price seems absurd to me.
One positive for GameStop moving forward is the $2bn capital it has been able to raise by issuing new shares. This capital will be used to expand the firm’s e-commerce business. GameStop has already announced leases on warehouses in Pennsylvania and Nevada helping spur the online shift. In an increasingly online world, it is important the GameStop expands past its traditional bricks-and-mortar business plan. Although the firm will likely never match e-commerce giants, I think this transition could benefit the GameStop share price down the line.
The Verdict
I think the GameStop share price has the volatility to make double-digit percentage moves in September. However, I don’t think I will see it explode again in September. Personally, the weak financials and outlandish valuation are a red flag for me. However, I am intrigued to see how the GameStop share price story continues to pan out, so will be watching from the sidelines but not buying.