Shares of GameStop Corp. (NYSE: GME) are rallying again, with the stock increasing 10.4% on Thursday to close at $134. In the past five days alone, the stock has shot up by 15.2%, indicating that the popularity of this meme stock refuses to abate among retail investors.
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However, this stock rally does not seem to reflect the fundamentals of GME’s business. Earlier this week, GME delivered a mixed bag of Q1 results where revenues outpaced consensus estimates but profitability was disappointing.
But it was GameStop’s investment in non-fungible tokens (NFTs) and cryptocurrency that disappointed Wedbush analyst Michael Pachter. GME recently launched a digital wallet that would allow gamers to send, receive, store and use cryptocurrencies and NFTs across decentralized apps.
Elaborating further, Pachter pointed out that console and mobile game developers, which are often large technology companies, would not be willing “to let a third party such as GameStop capture a meaningful share of consumer spending on-platform.”
The analyst added that multiple headwinds of supply chain issues, difficulty in procuring console hardware, and its “ongoing digital mix shift” would likely erode GME’s “new and pre-owned software sales.”
According to Pachter, in addition to the aforementioned challenges, GME’s aim to launch an NFT marketplace could result in the company burning cash at a significant rate for a better part of the next year or longer.
By the analyst’s estimate, GME is likely to exhaust its cash balance of $1.04 billion at the end of Q1 “within the next year.” Pachter added, “If this happens, it will likely trigger one or more capital raises that could dilute existing investors.”
As a result, the analyst remained bearish on the stock with a Sell rating and gave the lowest price target on the Street of $30. The analyst’s price target implies a downside potential of 77.6%.
Besides, Pachter, only one other analyst on the Street has covered the stock in the past three months. The consensus rating is a Moderate Sell with an average GME price target of $70, implying a downside potential of 47.8% at current levels.
Conclusion
It is evident that analysts like Pachter consider GME’s increasing investment into cryptocurrencies and NFTs as a negative move and remain bearish about this stock. As a result, the stock’s current rally seems to be unrelated to the company’s business fundamentals.
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