The story so far

GameStop is a consumer electronics retailer based the US. The declining demand for traditional store-based video games and films meant that the share price had been falling in the years leading up to the pandemic.

There was a large amount of short interest, referring to investors that are looking to profit from a fall in the share price. Shorting a stock can be done by borrowing the share from an existing shareholder with the aim of buying it back later at a lower price. The difference between the initial price and the price when it comes to buying it back is the profit generated.

Given that the potential loss on shorting a stock is unlimited (the share price could surge to infinity), GameStop shares saw large volatility as retail investors piled in and bought the stock. This caused other investors who were short to hurriedly buy back shares, further pushing the price higher.

Details of the GameStop stock split

Rumours about a stock split have been in the market since the start of the year. Given that the price is still elevated at $128, a stock split will cause the price to fall. This should make it more attractive for retail investors to buy, as would be cheaper.

A stock split has no fundamental impact on the value of a company. In the case of GameStop, for every one existing share held, three new extra shares will be given. As a result, the number of shares in circulation increases massively. This causes the share price to fall, but the market capitalisation will stay the same. At a simple level, one share worth £100 gives the same value as 10 shares trading at £10 each.

The extra shares will be given out in two weeks time.

Should I get involved?

Despite the buzz around the stock split, it doesn’t change the value of the company at all. Sure, historically, split at other large companies contributed to short-term rallies. It’s also good news for retail investors to be able to afford the stock. But for me, I don’t see any value here.

The business is trying to pivot to more online sales and is also trying to get involved in the NFT space. But as we currently stand, I’m not interested in buying shares in an outdated electronics retailer.

Even with the share price down 33% over the past year, it’s up over 30 times over two years. I struggle to be able to see how this is fundamentally sound for the long term. On that basis, I’m staying clear.

1. Yesterday’s business in tomorrow’s world

Back in the 1980s and early 1990s, there was a massive business called Blockbuster. In the UK, like the US, it was present in towns and cities across the land. Over time, though, demand for renting video cassettes plummeted. Blockbuster tried to update its business model but it was too little, too late.

Gamestop has been facing similar market dynamics in some ways. Its core business of selling physical computer games has come under pressure as more game sales take place online. That doesn’t mean the business is finished. A lot of gamers still like to buy physical games in a shop. Gamestop has beefed up its business model with ancillary revenue streams. Nonetheless, the business risks becoming outdated. That could lead to revenues falling,  as happened last year.

I think Gamestop could use its large presence, customer loyalty, and gaming expertise to turn its physical store estate into an asset with enduring relevance. But there’s no guarantee that approach will work.

2. Heady valuation

Gamestop shares have been caught in a speculative frenzy this year. As an investor not a speculator, that always concerns me.

It’s been good and bad news for Gamestop in my view. A higher share price has enabled Gamestop to raise cash by issuing shares. However, it also means the Gamestop share price is now out of step with the company’s value, in my view. Currently, the Gamestop market capitalisation is around $15bn. For a loss-making company in an industry with an uncertain future, that seems expensive to me. Even if I thought the fundamentals of the Gamestop business were attractive – and I don’t – I’d still be hesitant to buy shares at such a high price.

3. The Gamestop share price and wild sentiment

Many share prices reflect the tension between a company’s business fundamentals and how investors feel about its shares. The latter phenomenon, sentiment, can be a powerful force.

As we’ve seen over the past year, the Gamestop share price has been on a wild ride largely disconnected from its business performance. That’s because its shares have seen a speculative frenzy. While that has died down from its heights, Gamestop remains popular with many speculators. As last week showed, it is still subject to dramatic price swings.

Speculation can keep a share price detached from the business fundamentals for months or even years. Not only can it keep a share price improbably high – it can also  punish a good company by consistently leading to it being undervalued. Right now, not only do I think the Gamestop share price is overvalued, I’m also concerned that ongoing speculation could sustain an imbalance between its worth and cost. That is a risk for an investor like me. Despite its share price fall last week, I won’t be buying Gamestop for my portfolio.

In the past three weeks or so, the shares have moved up 23%. What’s going on?

GME: an unremarkable business but remarkable share

The GME business is a sort of HMV, whose primary focus is video games. As retailers from HMV to Borders have found, a decline in demand for physical products in a digital age can make previously successful business models struggle.

A lot of games are now sold or rented online rather than in physical format through a third party such as Gamestop. It’s worth noting, though, that the Gamestop business isn’t at the end of the road. It still has almost 5,000 stores across the US and other markets. Revenues last year topped $5bn, although the company made a loss. That was the third consecutive year of declining revenue, but clearly Gamestop remains a sizeable business. With the right strategy I think it could survive in some form for decades to come. For example, it could be a physical meeting place for collectibles fans to set itself apart from online games sellers. But as it stands, I don’t think it’s a remarkable business. It has a simple business model in a mature industry, which may also be a sunset industry.

By contrast, GME has been a remarkable share. That is not because of the business fundamentals, but instead is due to the rise and partial fall of GME as a meme stock. Now, it is rising again.

Some traders continue to play the Gamestop share price

I think the recent upwards movement in the GME share price remains tied to traders speculating on the actions of fellow traders, rather than investors assessing the company on a fundamental basis. Currently the company’s market capitalisation is over $16bn. For a loss-making video game retailer that looks excessive to me.

But the remarkable story of GME shares over the past year has made a lot of traders follow it closely. Hoping for further opportunities to get even a fraction of the profits generated by some GME trades earlier this year, I reckon a lot of the explanation for recent GME share price movements lies with traders not investors.

My next move on GME

As an investor not a trader, GME is not for me.

The share price could keep rising — but there’s clearly also a risk that it will crash. When shares get detached from the underlying fundamentals of the business, wild swings in share prices become more likely. Falls won’t necessarily reverse in future. Just because a share price crashes, it doesn’t mean it will ever rise again. Despite the recent rising GME share price, I will be giving it a wide berth.

The company, which rose to fame last year in the so-called Meme Stock rally, has become a focal point for market participants. The stock, which was trading for around $10 in November 2020, is now worth more than $200 a share. Over the past 12 months, it has returned 1,760%.

The outlook for GameStop shares 

Usually, I would stay away from these types of companies. Volatile equities can be incredibly difficult to own. As it is impossible to time the market. I never know when to buy or sell, which exposes me to the risk of significant losses and the potential for large gains. 

However, in the case of GameStop, the organisation has used its new-found market fame to turbocharge a turnaround plan that has been in the works for years. The company’s management has been able to tap investors for additional cash to fund expansion initiatives in the crypto space and e-commerce. 

The results have been quite impressive. GameStop reported revenues of $1.2bn for the three months to the end of July, up 26% year-on-year. Operating and net income was still negative for the period, but the group ended the quarter with $1.7bn of cash on hand.

With annual losses totalling in the region of $200m, this suggests the group now has enough cash to continue operating for nearly nine years without making a profit. 

Wall Street expects the group to report a small profit next year although, based on these projections, the stock is trading at a forward price-to-earnings (P/E) multiple of more than 1,300. That is a bit pricey for me. 

I am also concerned about the company’s management. At the end of last week, after the market closed before the weekend, the video game retailer announced its chief operating officer had quit just seven months after taking the job.

Time zone constraints 

This is one of the biggest challenges I face as a UK investor. Due to time zone constraints, I will always be behind the curve on news flow from across the pond. Sometimes it is also challenging to find information released by companies. I do not have the same problems when it comes to investing in UK businesses. 

As such, while I am encouraged by GameStop’s progress, I would not buy the shares as a UK investor. There will always be a chance the company will release some important news update  I will miss, because of where I am based. I cannot avoid this, and it is an added risk I want to avoid with such a volatile investment. 

Therefore, I am happy to avoid GameStop shares as I do not want exposure to additional risks. 

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.

GameStop has strong backing from retail traders, who’ve pushed the stock up by 3,900% over the last 12 months. However, the shares are also being targeted by short sellers, who reckon this business is now overvalued. With a new management team in place and earnings due in September, I’ve been reviewing the shares. Is this a stock I should be buying?

STONK!

GameStop shareholders have had a rocky ride in recent weeks. Ahead of Tuesday’s rally, the shares were down by 45% since hitting $302 on 9 June. Yesterday’s 20% surge has reduced this loss to 35%, but it’s still a painful drawdown for anyone who bought at the $300 level.

However, we may soon start to learn more about progress at this turnaround situation. Chief executive Matt Furlong and chief financial officer Mike Recupero were both appointed in June, so they may use next month’s earnings report to set out their initial strategy.

Interestingly, both men have come from senior roles at Amazon. I expect to see GameStop moving more of its sales online and perhaps slimming down its store estate. I think we might also see the company looking at opportunities to get involved in esports and livestreaming.

One big advantage

As a turnaround situation, there are several potential outcomes here. No one knows how things will turn out yet.

However, Furlong does have one big advantage — he’s got plenty of cash to work with. In June GameStop issued 5m new shares at an average price of around $225. This raised $1.1bn of fresh cash for the business.

My analysis suggests that based on last year’s losses, the company should now be able to operate for the foreseeable future. More realistically, this extra cash should mean that Furlong can invest in growth opportunities without needing to borrow money.

GameStop share price: what I expect in September

I’m impressed by the credentials of GameStop’s new management team. But the reality is that they only started work in June, so it’s too soon to know whether they can succeed.

GameStop has reported losses of more than $1bn over the last three years, during which its revenue slumped from $8.3bn to just $5.1bn. Turning this ship around may not be easy.

The good news is that the company will report its half-year earnings in September. This will give investors some fresh data to work with. In particular, we’ll learn more about how GameStop’s retail stores are performing as the pandemic eases.

I expect the company to publish earnings around 9 September, based on previous years. I can’t be sure, but if market conditions stay positive, I suspect the figures will get a warm reception, lifting the stock further.

Personally, my sums suggest that the shares are probably fully valued already. GameStop’s profits peaked at $400m in 2016. Achieving that now would value the business at 38 times earnings. That’s too much for me, so I won’t be buying at current levels.

Another stock had a similarly inexplicable rise yesterday. That stock was AMC Entertainment, which moved higher by 20.34%, again without any obvious catalyst. There is a link between Gamestop and AMC — they are both meme stocks.

What are meme stocks?

According to Wikipedia, a meme is an idea, behaviour, or style spread from person to person via the Internet. Social media platforms like Twitter and Reddit are often used to spread a meme. Meme stocks are particularly associated with heavy discussion on the ‘WallStreetBets’ section of Reddit.

Gamestop was once heavily shorted. The hedge funds and the like doing the shorting stood to profit if the Gamestop stock price fell. Using social media like the WallStreetBets sub-reddit, some retail investors coordinated their actions. By buying together they increased the price of Gamestop stock and forced the hedge funds to realise heavy losses.

Other stocks with significant short interest, like AMC, became meme stocks and experienced wild price moves. But over time, the rationale for buying meme stocks espoused on social media has changed. It is not just about teaching the hedge funds a lesson any longer.

Is Gamestop stock a good investment?

Reddit participants, and other investors, have argued that Gamestop stock actually had a compelling investment case, even at eye-watering prices. The argument is that the traditional bricks and mortar retailer has a digital strategy that will deliver. Also, concept stores, themed around retro games, for example, and offering e-sports hubs and tabletop games evenings will make the most of the company’s existing retail footprint. 

Gamestop narrowed its losses from $(6.59) per share in 2019 to £(3.31) in 2021, suggesting it is making a turnaround. Analysts forecast that Gamestop will have positive earnings per share of $0.07 in 2023, reversing a long history of losses. However, with the price where it is now, Gamestop stock is trading at over 2,000 times its forecasted 2023 earnings per share. That is an extraordinarily high multiple. Gamestop would have to deliver revenue and earnings growth far above consensus expectations to make that multiple even approach a reasonable level.

What’s next for the Gamestop stock price?

The Gamestop stock price rocketed yesterday with no identifiable change in its investment case. I cannot find evidence that the short interest in Gamestop increased yesterday, possibly explaining its stock price rise as retail investors took on the hedge funds again.

It would seem Gamestop’s price rise yesterday was down to buzz about the stock being generated on Reddit and other social media channels on an otherwise quiet day in the markets. And that’s the trouble with meme stocks like Gamestop. They can rocket 30% in a day and fall by that much just as quickly, often leaving investors puzzled as to why.

The story so far

It’s hard to succinctly pen down the full story of how the GameStop share price currently trades around $150. The initial rally was fuelled by a couple of key elements. First, the presence of Reddit and other Internet chat sites brought together a mass of retail traders that united their focus on a few stocks. This helped to push the price higher.

Second, institutional investors that were shorting GameStop were forced to close out their positions as the price moved higher. Shorting the stock would profit if the share price fell. However, given the losses when the price rises, funds were having to buy back shares quickly which only added fuel to the fire.

After this initial buzz during Q1, the GameStop share price fell significantly. It saw a similar rally in March, topping out around $265 before falling again. In early June, a third strong rally saw the price climb above $300, before again falling off down to current levels.

The real value in the GameStop share price

During this period, investors were largely trading on speculation. The fundamentals of GameStop are not great in my opinion. The latest figures for Q1 2021 showed a net loss of $66.8m. This was smaller than the loss at the same period last year, that of $165.7m. 

One driver behind the improvement (if you can call it that) was an increase in sales of 25.1%. I note this as good, along with the continued push of store closures to focus more online. Yet the business has been loss-making for years and I don’t see this trend materially changing anytime soon.

Even with the GameStop share price at $150, this still gives the company a valuation that’s too rich in my opinion. However, the company is taking advantage of the high share price. It issued 3.5m new shares back in April, raising over $550m. 

I personally feel the GameStop share price has run its course with speculative investors, yet doesn’t hold fundamental value at the current price. Therefore, I won’t be investing anytime soon as I think the price could easily fall further. 

I think Reddit stocks in general will continue to be hot picks, but the discussion forums appear to have moved on from GameStop. In order to stop myself from having to chop and change month by month, I prefer to buy and hold stocks for the long term. Some of the stocks I like in this regard are mentioned in more detail here. 

However, recently, an uneasy peace has developed. Shares in the specialist computer gaming retailer have bobbed around the $200 per share market since March. Over the past 12 months, the stock has increased in value by around 4,800%. 

But while the GameStop share price has taken on a mind of its own, the company has been working to transform its business model. 

Moving online

Traditionally, the company has operated a brick-and-mortar-store-orientated business model. But it’s been investing more in online operations more recently. 

GameStop announced it had taken a lease of a 530,000 sq ft fulfilment centre in Reno, Nevada, in its latest online expansion. This new facility will help the group expand its e-commerce operations across the west coast.

This expansion follows GameStop’s entry into a lease of a 700,000 sq ft facility in York, Pennsylvania.

The company’s share price performance has actually helped its transformation programme. As investors have clamoured to buy GameStop stock, the firm has raised $2bn by issuing new shares. 

This has provided much-needed capital for the group to spend on its e-commerce business. 

Interestingly, the rally in the GameStop share price has inspired a virtuous cycle. The company was struggling for funding before investors took notice of the business. As its valuation has increased, it’s been able to issue more shares and reinforce its balance sheet (AMC has been able to do the same). 

With more capital to play with, the company has actually become a better investment, and its fundamental value has increased. 

I think there’s now also a chance that if GameStop’s e-commerce drive starts to pay off, shares in the company could head even higher as the market reevaluates the business’s potential. 

GameStop share price risks 

Of course, the company’s success in this market is far from guaranteed. It’s going to have to take on larger, more established competitors.

Even with the GameStop share price at $200, I think it’s unlikely the company will be able to raise enough capital to compete effectively with its multi-trillion-dollar peers. 

While I do think the company has potential, I won’t buy the shares today. Although GameStop’s growth efforts are starting to yield results, I’d rather wait and see how the firm’s transition evolves before buying.

I think it’ll encounter many challenges in the months and years ahead. It’s unclear how the business will be able to deal with these challenges. 

As the company pushes ahead with its growth plans, I should be able to build a better picture of its long-term potential. That’s why I’m happy to sit on the sidelines for the time being. 

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.