Recently, Gamestop (NYSE:GME) proved its skeptics wrong when shares soared back to triple-digit prices in early March. Now, “meme stock” energy continues to give GME stock — which is popular with Reddit’s r/WallStreetBets community — tremendous support.
This may be enough to keep shares in the vide0-game retailer near current price levels in the near-term. Yet, at some point, the other shoe is going to drop. That is, as the company’s fundamentals don’t come close to backing up today’s valuation (a market capitalization of $13.7 billion), expect Gamestop to eventually tumble. Today, it’s nearly $200 per share, but I expect it to be back down to double digits.
Granted, it’s not a given that the stock will give up all of its unprecedented 2021 gains. With a turnaround in motion and its planned pivot to e-commerce, there’s likely enough potential to support GME at around $50. But, with that implying around 75% downside from today’s prices, taking a gamble now looks like a fool’s errand.
Of course, I could be proven wrong. Or, at least be made to eat humble pie in the short-term, particularly if the infusion of stimulus money into the market sends this name back toward $300. However, while that’s a reason not to go short this stock, don’t take that possibility to mean it’s safe to dive in.
Despite Inflated Valuation, GME Stock Could Hold for Now
The factors that sent Gamestop on its historic parabolic run have mostly played out. Sure, short interest remains high, with 44.6% of outstanding float. But this may not be enough to cause another epic short squeeze. A run back to its all-time high of $483 could be out of reach. However, there’s plenty in play to keep shares steady at around $200 per share in the short-term.
Namely, continued progress on its turnaround efforts. As you may know, the mania in GME stock came about due to Chewy (NYSE:CHWY) co-founder Ryan Cohen’s de-facto takeover of the company’s board. While the stock has taken off, Cohen and his team are staying for the long haul. Not only that, they are spearheading a pivot from its legacy brick-and-mortar retail operations toward an e-commerce-focused future.
As part of this transition, Amazon (NASDAQ:AMZN) alum Elliott Wilke is coming on board as its Chief Growth Officer. Subsequent developments with its e-commerce plans could help grow confidence that Gamestop has a shot of living up to its current valuation.
But, while headlines may be sufficient to support shares in the near-term, like I said, at some point the other shoe is going to drop. That doesn’t mean GME stock is doomed to fall back toward $10 and below. Yet, it does signal that there’s big downside risk once the “Reddit stocks” trend finally fizzles out.
Why the Shoe Will Eventually Drop
For the time being, there may be enough factors at play to help sustain the meme-stock investing trend. Stimulus money replenished the bankrolls of many retail traders. This could give the most hyped-up names some support in the coming weeks.
Additionally, with the vaccine rollout still underway, the anticipated post-pandemic recovery later this year has helped bolster stock prices, too.
However, uncertainty and concern have started to return to the market. The runaway bull market has lost its momentum. So, though it’s too early to tell, a market correction or selloff may be just around the corner.
That’s bad news for high-flying stocks in hot sectors like electric vehicles (EVs) and big tech. But, it’s especially bad news for investors that are still long on names like GME stock. It could be sudden, via a panic. Or, it could be gradual, as the enthusiasm for these stocks fades through the rest of 2021. Yet, no matter how it happens, consider it a matter of “when,” not “if.”
Ryan Cohen may have the talent and vision to make Gamestop a thriving company again. However, given the fact that his turnaround is still in its early stages, it’s too early to say GME will be worth its huge market cap. High expectations could be used to justify a rich valuation, but not to that extent. With this in mind, expect shares to eventually fall back down to double digits.
With Possible Downside Ahead, Avoid Gamestop at All Costs
Simply put, eventually the music will stop for the meme-stock mania behind GME. With the turnaround catalyst, I don’t see shares falling completely back to $10 per share and below. But, an eventual move towards $50 seems reasonable.
In other words, there’s at least 75% downside risk. Coupled with minimal runway for it to hit prior highs once again, the answer is clear with GME stock: avoid it at all costs.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
