It seems that GameStop (NYSE:GME) stock shares are finally coming back down to earth. Its recent earnings report contained a fair amount of positive news, but GME stock’s price is still falling.
There are multiple catalysts for the movement, but it’s best to summarize the downward momentum as a dose of reality. Traditional financial market influencers are having a stronger impact on GME stock than those on internet message boards.
GME Stock: Earnings Were Strong
GameStop investors had reason to celebrate when earnings were released on June 9 — that is, if they believe the company can pivot its business into this digital age. Baird analyst Colin Sebastian believes the company’s adaptation strategy still hasn’t been fleshed out and lacks substantial details.
Nevertheless, there was reason to be optimistic based on first-quarter earnings. Q1 sales in 2021 increased by 25.1% from last year to $1.277 billion.
Although GameStop continued to run at a loss by multiple metrics, it did stanch some of the bleeding. It reported an operating loss of $40.8 million and a net loss of $66.8 million in Q1. Those two figures were much higher last year. GameStop’s operating loss stood at $108 million, and it recorded a net loss of $165.7 million a year prior.
However, it’s evident by now that interest in GME stock has little to do with the fundamental improvement of its business. The narrative is much more about holding shares at all costs and collective control of the markets by the little guy.
Reality Is Reality
The truth is that despite the influence of Reddit’s r/WallStreetBets, at some point Wall Street and financial regulators will regain control of GME stock’s price.
Across the board, the average target price of GME stock is $65. That price is nowhere near its current price of $214, which indicates where Wall Street believes shares are headed.
Redditors are happy to buck Wall Street analysts and their traditional methods of determining stock values. Wall Street doesn’t have any express authority over the stock markets, after all. But the U.S. Securities and Exchange Commission (SEC) certainly does, and that means GME stock is bound to cool off in response to recent news.
SEC Sniffing Around and GME Stock Dilution
A recent Barron’s article spells it out plainly: Gary Gensler and the SEC are gunning for meme stocks and cryptocurrency. The SEC’s review relates to the practice of payment for order flow, clearly implicating high-frequency platforms like Robinhood.
The system is supposed to benefit customers by avoiding trade commissions and therefore reducing the overall cost of transactions. However, the SEC claims that Robinhood users would have been better off under a trade commission system.
The looming SEC threat will hang over GME stock and other meme stocks in the future. But another factor may be pulling shares back to earth: stock issuance and dilution. GameStop plans to issue five million additional shares at market prices. Pachter believes the shares will sell for roughly $200, which would net GameStop $1 billion.
Perhaps Redditors are finally understanding that dilution is a real thing. Maybe they’ve learned that if they collectively hold at all costs, they’ll eventually lose. In fact, if they hold indefinitely, GameStop will likely issue more overpriced shares, then rake in the proceeds for its pivot toward digitization. No matter what the future holds for the company, at some point, GME stock investors will need to face reality.
Thomas Yeung is an expert when it comes to finding fast-paced growth opportunities on Reddit. He recommended Dogecoin before it skyrocketed over 8,000%, Ripple before it flew up more than 480% and Cardano before it soared 460%. Now, in a new report, he’s naming 17 of his favorite Reddit penny stocks. Claim your FREE COPY here!
On the date of publication, Alex Sirois 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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.