If there’s any existing company that could be politely described as a “legacy business,” it would be GameStop (NYSE:GME). With the novel coronavirus pandemic causing people to download or stream games instead of visiting stores in person, it’s hard to envision a strong value proposition for GME stock today.
On the other hand, value has seemingly become irrelevant in today’s financial markets. The balance of momentum/growth stocks versus value stocks has gotten out of whack.
In 2021, GME stock has become emblematic of the stock market’s buy high, sell higher credo. To me, it’s like a game of musical chairs and the music has already stopped.
Yet, we really shouldn’t treat GME stock like it’s a game at all. This isn’t Call of Duty or even Monopoly. Actually, it’s a reality check that every investor needs to hear before it’s too late.
A Closer Look at GME Stock
Call it the “slope of hope” or a “pop and drop” if you’d like. It’s the old Eiffel Tower pattern in GME stock, with a steep rise and an equally steep, inevitable decline in the share price.
A year ago, GME stock was trading at around $4. Starting in the summer of 2020, the share price gradually but relentlessly worked its way upward. By the end of the year, the GME share price had broken above $18.
You’d think that would be enough gains for the bulls, right? But as we now know in hindsight, there was much more to come.
Thus, in late January a buying frenzy allegedly spurred by the Reddit group r/WallStreetBets propelled GME stock to a dizzying 52-week high of $483.
I’ll give you another cliche in the financial markets now: price chasers get punished. This cliche turned out to be true, as GME stock tumbled from its peak almost as quickly as it had ascended.
Purpose Served, Time to Move On
As of Feb. 19, GME stock was trading at $40 and change. So, are there any lessons to learn here? And, should investors buy GME shares now?
First off, I would assert that buy low, sell high simply doesn’t apply here. Sure, GME stock is lower than its near-$500 peak. Yet, this doesn’t mean that the stock is a bargain, by any means.
Unfortunately, GameStop is earning -$4.22 per share. Generally speaking, I would need a very compelling reason if I were to recommend investing in a company with negative earnings.
Besides, if r/WallStreetBets users’ purpose in running up GME stock was to inflict justice upon short sellers like Citron Research and Melvin Capital, then that objective has already been met.
It’s not a wise strategy to count on the r/WallStreetBets crowd to pump GME stock up again. By now, it’s old news and the Redditors are, most likely, moving on to some other pump target.
Way Beyond Rational
It’s not every day that you hear about multibillionaire and Microsoft (NASDAQ:MSFT) co-founder Bill Gates publicly opining on a particular stock.
Usually he just stays out of the fray. However, the GME stock mania was so notable that evidently Gates couldn’t stay silent on the matter.
“People enjoy gambling. Sadly, it’s a zero-sum game,” Gates commented recently in reference to the Reddit-fueled short squeeze of GME stock and possibly other stocks.
“The idea that you drive a valuation way, way beyond what is rational, it’s hard to see that societally as a good use of time… And, you know, the people who get in it early get a windfall. The people who get in late feel like suckers,” Gated added.
I’m not trying to imply that anyone should avoid GME stock because a famous billionaire is sending out a caution signal about short-selling mania.
Rather, I’m leveraging Gates’ stature to make a point. Namely, it’s too late to get in early on GME stock. And now that the party’s over, somebody’s got to clean up the mess – and believe me, you don’t want that job.
The Bottom Line
Gates isn’t the only one who’s spoken up about this topic. I provided a warning about GME stock on Feb. 1, when the share price was above $200. Not too long afterward, it fell to around $40.
GME stock could continue to fall much further than that. The purpose of the short squeeze has been fulfilled, and all that’s left is a company with a dire earnings outlook.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.