For a while, video game retailer GameStop (GME) was making gains largely on the basis that major hedge funds were short-selling it. It became one of the—possibly even the—first “meme stocks,” stocks that were really only attractive on certain Reddit groups. Now, GameStop made some early gains in premarket trading on Monday with a new cryptocurrency wallet.
The company reversed those gains going into today’s trading session, and I remain bearish. This company’s problems likely aren’t going to be solved by a crypto wallet. Getting in now is likely not a good play.
The last 12 months for GameStop shares have been a mostly downhill ride. Some recoveries took place over that period, but none lasted more than a few days. Overall, the company is trading about 50% lower than it was this time last year.
Wall Street’s Take
Turning to Wall Street, GameStop has a Moderate Sell consensus rating. That’s based on just one Sell assigned in the past three months. GameStop’s price target of $30 implies 68.6% downside potential.
Keep in mind, though, that there is only one recent analyst rating.
Investor Sentiment is Distressingly Mixed
On the surface, GameStop should be an easy target to stay away from. The company boasts a Smart Score on TipRanks of 2 out of 10, the second-lowest ranking and the next lowest step in “underperform” overall. Yet, there are some odd bright spots for GameStop investors.
The biggest bright spot is insider trading. GameStop insiders are heavily buy-weighted. They’ve been so for the last year. The last insider transaction was recorded back in February, and buyers led sellers three to two. Meanwhile, for the full year, it was an even bigger win for the bullish GameStop trader, as insider buy transactions led sell transactions 10 to four.
Retail investors holding GameStop in their portfolios on TipRanks, meanwhile, are a bit mixed. While the total number is up 0.6% over the last 30 days, it’s down 0.2% over the last seven days.
GameStop’s dividend history would be more of a help if it held out. The company once had a stable dividend, paying routinely since 2012. That stopped like a clock dropped off a building after March 2019, though. GameStop hasn’t paid a dividend since.
Then there’s the matter of hedge funds, as based on the TipRanks 13-F Tracker. Hedge funds have slashed their positions in GameStop to bare-bones levels in recent months. In fact, GameStop positions are now so small compared to what they were in 2020 that they no longer appear on a chart.
Hedge funds did increase their position by 58,800 shares last quarter. However, this means little against the roughly 6.224 million shares held in December 2020.
Minor Successes Overshadowed by Everything Else
Essentially, what GameStop is trying to do here is one of the last few things that it actually can do. The wallet is able to handle not only cryptocurrencies—it’s an Ethereum wallet, at last report—but it will also allow gamers to both send and receive in-game assets without needing to leave a web browser.
This will dovetail into plans to bring out an NFT (non-fungible token) marketplace starting sometime before the end of July. The beta version has already launched and offered some success.
However, it’s clear that the company’s disastrous earnings report—which boasted a $147.5 million loss—is overshadowing the crypto-based successes the company recently showed off.
In fact, that’s a pretty fair way to describe GameStop, in general, these days: minor successes overshadowed by a crashing business supported by a business model that has less and less validity with each passing day.
We know that customers are increasingly turning to digital downloads when it comes to getting their games. While 2020 is an outlier year thanks to the impact of COVID-19 on the game development community, it’s clear that the overall trend is fewer physical release games and many, many more digital releases.
This leaves GameStop—whose primary business model is effectively “buy used games cheap and resell them at a profit”—in a terrible situation. This is partially why GameStop tried expanding into used electronics back in 2017. The writing was already on the wall for games, and GameStop needed to augment its revenue stream.
Investors, meanwhile, are in that same terrible position. At least, they will be until GameStop can effectively figure out how to get its revenue back on track. It gets worse from there.
Employees are suing the company over labor laws in New York. The hedge fund that shorted GameStop closed its doors altogether. It’s clear something needs to change at GameStop if investors want hope of realizing real gains.
Concluding Views
Pretty much everything about GameStop does not look good right now. The hedge funds have all but abandoned ship. Retail investors are shaky. There’s been no dividend in the last three years. Just to top it off, GameStop’s business model is sinking fast, and attempts to recover haven’t worked out well.
Throw in the overwhelming downside potential currently on this stock from the lone analyst actually providing perspective, and the picture worsens to such a degree that being bullish is next to impossible.
Thus, I’m bearish on GameStop, a company whose best days are behind it. Unless it can figure out some new draw quickly, the long-term future does not look bright.
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