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GME Stock: The E-commerce Play May Not Be Enough

Currently, Gamestop (NYSE:GME) stock seems to be more than just a stock. GME stock is really a symbol for a new approach to investing. This involves leveraging the power of retail investors but also exploiting inefficiencies in the markets. And it has all been made possible by next-generation brokers like Robinhood and social platforms such as Reddit.

Retailers walk past a GameStop (GME) store in New York City, New York.
Source: Northfoto / Shutterstock.com

However, it’s not clear if this trend has lasting power. Let’s face it, Wall Street is prone to fads that can quickly fade away. For example, we saw this happen back in the late 1990s with the emergence of stock chat boards on AOL and Raging Bull.

Regardless, GME stock has remained extremely volatile. The chart looks downright chaotic. Yet, the shares have still gone from a close of $17.25 at the start of the year to about $187 today. Right now, Gamestop has a market capitalization of $13 billion.

So, what’s next for GME? Is it safe for investors to be bullish on this name?

The Fundamentals Behind GME Stock

One of the knocks against GME stock is that investors are not paying attention to its core fundamentals. However, while there is definitely merit to the argument against this name, there is still a bull case to be made for the potential growth here.

First of all, the company has a well-known brand. In fact, you could say it has some nostalgia behind it, with Gamestop being founded back in 1984.

Next, the company has continued to benefit from the growth in next-generation game consoles, namely Microsoft’s (NASDAQ:MSFT) Xbox and Sony’s (NYSE:SNE) Playstation models. The fact is that gaming remains a strong growth category — and this will likely remain the case for years to come.

On top of that, there has also been deep restructuring in the company, which has been spurred by the novel coronavirus. On a year-over-year (YOY) basis, Gamestop has been able to find more than $400 million in cost savings. A big part of this effort has been its unloading of some 693 stores.

However, when it comes to GME stock, the main focus is now on its digital strategy. To that end, the company has been showing progress. In the latest quarter, there was a sizzling 191% jump in global e-commerce sales, which made for 29% of total sales.

Ryan Cohen, who is the co-founder of Chewy (NYSE:CHWY) and now leading the charge at Gamestop, will definitely have a positive impact on this strategy. His venture firm recently took a 12.9% equity stake in GME stock and he has been quick in making changes in the executive ranks. For example, former Amazon (NASDAQ:AMZN) executive Jenna Owens recently became the company’s COO. These kinds of changes bode well for the company.

The Factors Against Gamestop

However, even with the various advantages of Gamestop, I still think investors need to be wary. Note that the company has not presented a clear strategy for its digital efforts. In fact, on the latest earnings call, management did not even take any questions.

Plus, another nagging issue here is that there’s a secular trend in gaming towards cloud-based systems. This poses a major disruptive threat to Gamestop as it still has many brick-and-mortar stores. Besides, when it comes to old-line retailers, they generally have a hard time transitioning their businesses to digital.

Perhaps the biggest problem with GME stock, though, is its lofty valuation. It seems that Wall Street is factoring in a huge comeback story already.

Keep in mind that analysts are fairly skeptical. For example, on Tipranks, the consensus price target is only $54.40. That assumes 71% downside from current levels.

Now, of course the shares could have explosive moves on the upside like we saw earlier this year. But, as time goes by, it could be very tough for GME to hold its outsized valuation.

On the date of publication, Tom Taulli did not hold (either directly or indirectly) any positions in 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 founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/gme-stock-the-e-commerce-play-may-not-be-enough/.

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