The meme stock to end all meme stocks, GameStop (NYSE:GME), is finally losing a bit of steam.
Shares cooled off last Thursday after volatility across the broader markets pushed the major indices in the red. However, retail investors have bid up the stock, and shares are more than double their May low of $136.50. Meanwhile, in the first two hours of June 8, the price has risen nearly 17% to a high of $344.66 and then dropped even lower than its starting price.
Many investors are hoping that a digital transformation will help the company mount a much-needed turnaround — GameStop has a long-term vision of transforming from a brick-and-mortar retail company into a digital enterprise.
However, this is easier said than done.
As I have mentioned in prior articles, GameStop was struggling long before the pandemic. The top line is consistently declining over the last five years as it tries to keep up with Sony (NYSE:SONY), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), competitors who are increasingly relying on digital innovation for their future success. Not the case when it comes to GME.
Hence, even though the temptation to join in is there, I will still advise you to stay miles away from this one.
Flawed Fundamentals
Through the end of 2020, GameStop’s sales reportedly dropped more than 30% per quarter, dropping in 10 out of 11 of its previous quarters. In the last decade, the video game retailer has had several years with negative revenue growth. If we take a look at the data from the last 12 quarters, GME has reported a “positive” surprise just four times. GME had an operating income of $648 million in 2015. Last year, the company was sitting at a $238 million operating loss.
In many ways, GME reminds me of Dish Network’s (NASDAQ:DISH) Blockbuster. There was a time when it looked like the home movie provider could do no wrong. However, it has become a cautionary tale of not evolving with the times. In 2004 then CEO of Blockbuster John Antioco understood the need to invest in an online platform. However, he faced stiff opposition from activist investor Carl Icahn who disagreed and removed him. In five years, the company was bankrupt.
Understandably, if GME wants to avoid this future, it must think outside of the box and focus on building its digital platform. The good thing is that when George E. Sherman took the helm as GameStop’s new CEO in April 2019, he had two things in mind: reducing costs on the brick-and-mortar business and expanding the digital platform.
The strategy is working. On Jan. 11, the video game reported worldwide sales results reflecting a 4.8% increase in comparable-store sales and a 309% increase in e-commerce sales.
But the company’s e-commerce setup still does not compare in any way to Amazon or Sony.
Beginning of the End
The biggest question surrounding GME stock is whether it is best to count your blessings and exit. Shares are still up over 80% in a month, so Redditors still like this stock — GME and AMC (NYSE:AMC) have traded spots several times for the most popular choice among members of the platform.
However, you have to ask yourself where GME stock will be in five years. Our very own Chris Markoch wrote a great article about Disney (NYSE:DIS). He wrote, “If you had purchased shares of DIS stock on Jan. 7, 2000 and never sold your shares, you are sitting on a share price gain of over 470%. That doesn’t include any dividend gains you may have reinvested over that time.”
In the article, he highlights how Disney did not sit on its haunches and has transformed itself into one of the biggest conglomerates in the world.
Although new GME management deserves credit for pivoting the company into a new direction, it will take time to alleviate the issues that ail the video game retailer and move forward with a coherent strategy. Reddit enthusiasm notwithstanding, a lot of work still needs to be done before GME stock is a viable investment again.
My Final Word
For a long time now, I have been advocating against loading up on GME stock because of the flawed fundamentals. But does that mean that another rally is not around the corner? For sure, one cannot say that considering time and again, Redditors have shown their resilience when it comes to this company.
In many ways, GME stock has become iconic because of the support it has received from r/WallStreetBets. I do not expect that to change anytime soon. However, is this a stock that you can buy and keep for the next five years? According to the fundamentals, if you do that, it will be a bad decision.
On the date of publication, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
