Back in November, GameStop (NYSE:GME) was mostly forgotten by Wall Street bulls. But this would end in a big way as Reddit investors – from the WallStreetBets group – started to aggressively buy up GME stock. The idea was to force a short squeeze, which would mean hedge funds would have little choice but to buy back large amounts of shares to close out their positions.
Of course, this started an epic rally in GME stock, which would hit a high of $483 per share. The market capitalization would exceed $30 billon, putting the valuation higher than companies like Delta Air Lines (NYSE:DAL), Stanley Black & Decker (NYSE:SWE) and Rockwell Automation (NYSE:ROK).
There would also be a nationwide debate about the fairness of the markets. Even Treasury Secretary Janet Yellen would look into the matter.
But GME stock has quickly seen a steep dive. The shares are now trading at a much more reasonable $46 per share.
Then what can we expect now? Might we see another big rally? Or will GME stock continue to fall? Let’s take a look:
What Now for GameStop?
After a company sees speculative activity, it is rare for there to be another bull run – at least in the short run. And this will likely be the case with GME stock.
First of all, there is the fear-of-the-falling-knife phenomenon. When there is an unwinding of a speculative stock, the drop can be quick and sharp. It may also undershoot the fundamental value of the operations.
Note that we are already seeing rapidly diminishing interest in GME stock. For example, the level of commentary on Reddit has been falling and so has the trading volume. Instead, investors are looking for other short-squeeze opportunities, such as in the cannabis space. But even this trade is quickly losing momentum.
Next, savvy investors have already capitalized on the outsized valuation of GME stock. Just look at Fidelity’s Joel Tillinghast, who manages the Fidelity Low-Priced Stock Fund and the Fidelity Series Intrinsic Opportunities Fund. Through these vehicles, he had become the largest holder of GME stock. But in late January, he would sell most of his holdings – making a tidy profit.
Finally, when it comes to GME stock, short sellers will certainly be more careful. They will try to ensure they are not in a situation where a stock will get manipulated and potentially destroy a portfolio.
It’s kind of boring nowadays but the fundamentals truly matter. Even huge amounts of buying from investors can only last so long.
And when it comes to GameStop, there remain nagging issues. The novel coronavirus pandemic has hit the company particularly hard because of its large retail footprint. Then there has been the secular trend toward online distribution of games. If anything, GameStop appears to be in a similar situation that Blockbuster faced when Netflix (NASDAQ:NFLX) disrupted the industry with its streaming platform.
To get a sense of the deterioration of the business, look at the revenues from fiscal 2012 to fiscal 2019 (before the impact of the pandemic). The sales fell from $9.6 billion to $6.5 billion.
Bottom Line on GME Stock
It’s true that the company has been investing in its digital platform. And yes, RC Ventures recently acquired a 12.9% interest in GME stock. The partner at this firm is Ryan Cohen, who is the co-founder of Chewy (NYSE:CHWY). In other words, he has great tech chops.
GameStop also has some key advantages. It’s brand is particularly strong – and has gotten a big boost lately from the stock frenzy! There is also the valuable PowerUp membership base, which is at about 55 million.
But despite all this, there will be lots of heavy-lifting to get GameStop back into the growth mode. And there is likely to be more selling in the stock as the enthusiasm fades. So the bear move may not be finished.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.