Is GameStop Stock a buy?
Video game retailer GameStop (NYSE: GME) has had a wild ride the past few months. Widely written off as a failed dinosaur in 2019 and early 2020, the stock came back to life when Microsoft (NASDAQ: MSFT) and Sony (NYSE: SONY) introduced its next-gen gaming consoles last fall. And then the real fun began, as retail investors organized to drive GameStop’s heavily shorted stocks “to the moon” in January. The share closed on December 11 at $ 11 per share, skyrockets up to $ 483 per share on Jan. 28, then fell back to earth. Last Friday, GameStop closed the day at $ 40.59 per share.
Is it time to buy GameStop for more reasonable prices, then? Well no. Here’s why GameStop still looks like a terrible investment.
Past performance is no guarantee of future results
The unique market conditions that set up GameStop for the January fireworks display are simply not here anymore.
The number of GameStop shares borrowed by short sellers exceeded the total number of actions, paving the way for short compressions to end all short compressions. A few well-placed trades took GameStop’s trading volume to the ceiling in the blink of an eye, pushing stock prices higher and forcing short sellers after short sellers to hedge their negative bets on GameStop. Lather, rinse, repeat, and you get this very unusual stock chart:
The campaign by Reddit group WallStreetBets burned most of its rocket fuel. Thirty-one percent of the company’s shares were sold short at the end of January – still among the largest short-selling ratios in the market but well below the 102% seen at the end of 2020. The explosive ingredients of the big squeeze at discovered are gone. There will be no more moonlight.
Balance activation time
Benjamin Graham, master of value investing, said that “in the short term the market is a voting machine, but in the long term it is a weighing machine.” The GameStop Popularity Contest is over and it’s time to weigh the stock on the merits of the real business.
From that perspective, I’m afraid not much has changed. Activist investor Ryan Cohen won three seats in GameStop’s boardroom, including one for himself, and the company can be expected to have a strong focus on e-commerce operations. This is the right decision, but it may already be too late.
Cohen argues that GameStop could carve out a significant slice of the digital video game market with its well-worn brand name. I’m not sure the company can find a foothold against another last name Amazon.com (NASDAQ: AMZN). There is also the uncomfortable fact that most console games can be downloaded directly from Sony, Microsoft and Nintendo (OTC: NTDOY), completely excluding middlemen like GameStop from the equation. Cohen also proposed that GameStop create its own esports gaming leagues, cloud gaming services, and other interesting top pilots, but the name GameStop doesn’t seem like a game-changer for these ideas to me. .
Sell ’em if you got’ em, boys
GameStop is no better today than it was in mid-December, but the market cap has more than tripled in those two months. The company has a lot of work to do before I consider hitting the buy button, and I certainly wouldn’t recommend jumping into stock at today’s superheated prices.
Let the WallStreetBets frenzy wear off before you act, unless you already own GameStop shares. I don’t think you’ll see a much better chance of lock in what is left of your profits for the foreseeable future.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.