Trading meme stocks like GameStop (NYSE:GME) stock can be dangerous, especially if you get trapped during the hype phase. Any piece of news can feel like a buy signal, but unless you have very lucky timing, you can end up holding the bag with a losing position. All in all, I am bearish on GME stock and would not choose to buy it now.
Headquartered in Texas, GameStop sells physical copies of video games and, to a lesser extent, digital copies of games. It’s not an ideal business model at a time when many people stream or directly download their video games.
Beyond the company’s actual business, GameStop represents the get-rich-quick dream of making money from a meme stock during a massive short squeeze. Some folks might be able to flip GME stock for a quick trade, but serious investors should conduct their due diligence on the company itself. In my opinion, it’s just too dangerous to hold GameStop shares for any length of time.
Another Week, Another Short Squeeze
As you may recall, GameStop stock zoomed from $18 to $65 a couple of weeks ago. That short-squeeze rally made the front-page headlines in the financial press. However, the stock’s return trip back to $18, which occurred in the following days, didn’t receive as much attention.
That’s the problem – retail stock traders hear all about the rise of meme stocks, but they might not be aware of the drop that followed the pop. This also happened during the original meme-stock rally of early 2021. GME stock rocketed higher but then coughed up the gains from the second half of 2021 to early 2024.
Unfortunately, some investors tend to have short attention spans and get drawn in by the meme-stock hype. This week looks like a textbook example, as GameStop stock jumped nearly 25% today with high trading volume.
No, there wasn’t another social media post from meme-stock guru informally known as “Roaring Kitty.” He precipitated the GME stock rally that happened a couple of weeks ago after he posted on X (formerly known as Twitter) a drawing of a man in a chair with a game controller moving into an upright sitting position.
That X post didn’t even have any text attached to it. There was only a drawing, but evidently, it was enough to get eager meme-stock traders excited and ready to buy GameStop shares again.
Meanwhile, GameStop doesn’t have too many analyst ratings, probably because the stock is highly volatile, and it’s difficult to assign a value to the company. Also, bear in mind that GameStop doesn’t have a positive trailing 12-month price-to-earnings (P/E) ratio because, despite an earnings-positive fourth quarter of Fiscal Year 2023, the company hasn’t been profitable overall during the past year.
It Wasn’t “Roaring Kitty” This Time
So, what caused the GameStop share price to roar nearly 25% higher on Tuesday? It wasn’t a new social-media post from “Roaring Kitty,” nor was it an earnings report. Instead, it was another flimsy excuse for the short-squeeze crowd to set their sights on GME stock.
Here’s the scoop. Reportedly, GameStop disclosed that it had generated aggregate gross proceeds, before taking out commissions and offering expenses, of around $933.4 million from an at-the-market equity offering program. To put it simply, GameStop sold 45 million shares to generate a large amount of capital.
Perhaps it was a positive surprise that GameStop generated approximately $933.4 million from the share sale. Again, I’ll emphasize that some short-squeeze traders will use any excuse to start a new meme-stock rally.
At the same time, prudent investors should note that this isn’t really “free” money for GameStop. Large-scale stock sales can raise concerns about share-value dilution. Besides, it may be a bad sign, financially speaking, for a company if the management feels the need to raise capital this way.
In addition, raising $933.4 million doesn’t magically solve all of GameStop’s financial problems. Alarmingly, the company’s first-quarter Fiscal-Year 2024 (the 13 weeks ended May 4) sales are anticipated to fall into a range of $872 million to $892 million, marking a sizable decline from $1.24 billion in the year-earlier quarter. Moreover, for that same quarter, GameStop is expected to return to its money-losing ways with an earnings loss of $27 million to $37 million.
What Is the Price Target for GME Stock?
On TipRanks, GME comes in as a Moderate Sell based on just one Sell rating assigned in the past three months. GameStop stock’s price target is $7.00, implying 70.6% downside potential.
Conclusion: Should You Consider GameStop Stock?
The one analyst we’re aware of who covers GME stock is Wedbush’s Michael Pachter. He’s certainly not bullish on the stock, and Pachter expects to “see continuing sales declines next year” for GameStop. No amount of share selling will solve this problem for GameStop, as I see it. Furthermore, it wouldn’t surprise me at all if GameStop ends up resorting to more share sales in the future.
Therefore, I’m not getting too excited about this week’s meme-stock rally. Just look back at what happened to the GME share price from late 2021 to early 2024, and you’ll see what could easily happen after the current short-squeeze rally ends. Consequently, I am bearish on GameStop stock and would not consider buying it at all.
