GameStop (NYSE:GME) continues to attract attention in 2021. Is it more than a meme stock? Is it worth spending time monitoring GME stock?
Or even buy it?
I was bearish in my last article on GME stock. And, I continue to be bearish. Very bearish. My independent conclusion is based on facts and financial data, which I will discuss below.
Fundamentals and GME Stock
In my previous article in March, titled my previous article headlined “11 Reasons to Avoid GameStop Stock Despite the Hype,” some of the key points about the company included these seven:
- Declining sales growth
- Net income is negative
- Total shareholders’ equity has collapsed
- A business plan that is not working
- Free cash flow growth has been too weak
- Debt level has increased
- Long-term growth is nonexistent
Since that article was published, shares of GME stock went from $132.35 per share to $184.50 per share – a gain of 40%. It is currently trading around $174.
For analysts to change their investment thesis on a stock dramatically from a “sell” to a “buy” recommendation, or vice versa, fundamentals must change or a key catalyst should be present. What is the key catalyst now for GME? For me, there is none.
Will it be its digital evolution so that the video game retailer will conquer the industry in the U.S.? Because its business model, so far, does not work. The company is bringing in losses.
And as I wrote before, from a valuation perspective, the book value per share for GME stock has collapsed in the most recent years. This is fact, not emotion or opinion.
Trading Volume Has Diminished
I am not a technical analyst, at least not yet but I do know about technical analysis. And one of the catalysts in technical analysis for a stock to move higher is increased volume. GME stock has for the past several trading days witnessed trading volume collapsing. On March 25, 2021, the trading volume was about 51 million shares. On April 6, 2021 trading volume was 6.1 million shares.
I am wondering. Could it be the case that on Jan. 22, when the stock had a trading volume of about 200 million shares and a closing price of $65.01 per share, that it seems too pricey for early investors now two months later and a few days later?
To me, it could, and I believe so. The stock is very overvalued now.
Important Information to Analyze
The company recently announced preliminary sales results for the first nine weeks of the 2021 fiscal year. In its statement, GameStop said its global sales increased:
“For the first nine-weeks of fiscal 2021, total global sales increased approximately 11% from the nine weeks ended April 4, 2020.
February: the four-week period ended February 27, 2021, total global sales increased approximately 5.3% from the four weeks ended February 29, 2020.
March: the five-week period ended April 2, 2021,total global sales increased approximately 18% from the five week period ended April 4, 2020.”
Now a caution about these results as they are based on preliminary sales performance. The official results upon the completion of the month-end and quarter are much more reliable. So I am skeptical about this data. This press release is for people who are bullish on GME stock.
Shareholders Face Dilution
Another noteworthy press release from the company had bad news for investors. It announced an at-the-market equity offering program. The announcement said the company could sell up to 3.5 million shares.
In addition, GameStop said proceeds of the stock sale would be used “to further accelerate its transformation as well as for general corporate purposes and further strengthening its balance sheet. The timing and amount of any sales will be determined by a variety of factors considered by the Company.”
So the first thing that comes up is stock dilution, which is a negative thing for investors. And what is interesting to me is that, in this press release, the company mentions, “In no event will the Company sell more than 3,500,000 shares of Common Stock under the ATM Offering, and aggregate gross proceeds will not exceed $1,000,000,000.”
I do not understand why this cap on the number of stocks offered. Investors may want to buy more depending on the price offered. If GME is to dominate the gaming and entertainment industry why place a cap?
Yes, the dilution is too bad for investors but what does the management think about it? I mean it is a smart move by the management, although bad news for shareholders. And it is crucial to wait and see the effects of this equity offering program. How will actually the management use the proceeds?
The cap on money to be raised does not make sense. You want as much cash as possible to have options to pursue your strategic vision. Pay off debt. Invest in the future. Be a dominant company. Lead the change, not just be known as a meme stock and weird games in stock market history.
Verdict on GameStop Stock
I am bearish on the GME stock. The stock dilution makes extreme valuation worse. And in the absence of real and measurable positive catalysts, nothing has changed. I advise avoiding the stock. No real value is present now.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
