GameStop (NYSE:GME) continues to take steps that will strengthen its e-commerce business, and the company should benefit from a couple of macro trends in the near-to-medium term. Nonetheless, GME stock remains meaningfully overvalued and the company is poised to be hurt by an important likely development in the longer term.
Given these points, I recommend that longer-term investors sell GME stock now and buy the shares when they reach a much more favorable level.
GameStop’s incoming chairman, Ryan Cohen, a co-founder of pet e-commerce website Chewy (NYSE:CHWY), is developing a plan to beef up the company’s e-commerce unit. According to The Dallas Morning News, Cohen is seeking to improve the company’s customer service and have it offer many more products and services online.
He’s also proposed starting an online game trade-in program and indicated that GameStop should “pivot toward becoming a technology-driven business that excels in the gaming and digital experience worlds.”
On a more concrete level, in late April, the videogame retailer raised about $551 million which it intends to use to enhance its e-commerce business. In early May, GameStop said that it would expand its fulfillment network.
GME Stock Positives
In Q1 the industrywide sales of the video-game sector rose 30%, while spending on games climbed 25%.
“While we are still seeing elevated rates of both engagement and spending resulting from changes in consumer behavior driven by the pandemic, we are also seeing cyclical gains from the November launches of both the PlayStation 5 and Xbox Series consoles,” NPD Group analyst Mat Piscatella said.
As school lets out after the demand for video games is likely to stay elevated at least through the summer. Further, the strong videogame trends could easily continue well into the fall.
In the medium-term, the decline of cryptocurrencies could result in many millenials shifting their money from that sector to “Reddit stocks,” including GME stock.
Too Much Downside
According to Yahoo Finance, GameStop’s trailing price-sales ratio is nearly two. That’s much higher than many other, much better established e-retailers, such as Overstock (NASDAQ:OSTK) and JD.com (NASDAQ:JD) whose trailing P/S ratios are 1.14 and 0.95, respectively.
Retailers with brick-and-mortar stores and vibrant e-commerce businesses, such as Macy’s (NYSE:M), Wal-Mart (NYSE:WMT) and Petco (NASDAQ:WOOF), have much lower trailing P/S valuations than GME stock as well.
On April 19, Clark Schultz reported that Telsey Advisory Group analyst Joseph Feldman believes that GME stock is overvalued.
This was true, according to Feldman, even if one assumes that the a bullish scenario for the company plays out and takes into account its metamorphosis into a major e-commerce player. He kept a $30 price target and an “underperform” rating on the shares.
If everything goes very well for GameStop and the U.S. avoids a recession for the next couple of years, I could see GME stock exceeding its current levels in 2023. Nonetheless, I think that the shares’ risk-reward ratio is negative at this point.
The Bottom Line on GME Stock
With the market becoming wary about growth stocks and a cryptocurrency crash looming, investors will probably get a chance to buy GameStop shares at much lower levels.
Only in the best of scenarios can the shares climb meaningfully above their current levels by 2023.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
