Mixed Fiscal Data Suggests That GameStop Is Still Vastly Overpriced

It seems that meme-stock traders aren’t quite finished with GameStop (NYSE:GME) just yet. As soon as you think that the frenzy over GME stock is finally finished, they suddenly bid the share price up again.

A Gamestop video game store in the Herald Square shopping district in New York
Source: rblfmr / Shutterstock.com

This has happened not just once, but multiple times in 2021. However, these things don’t last forever and eventually, amateur traders will get bored with GameStop and will move on to something else.

Until that happens, it’s perfectly fine to conduct your due diligence on GameStop stock. What you’ll find is a mixed fiscal picture, and perhaps even a company in expansion mode.

But researching GameStop isn’t the same as making an investment. For the time being, I’d say that this stock is simply too hot to handle.

A Closer Look at GME Stock

To put things into perspective, GME stock shares cost less than $5 just a year ago.

Then the Reddit and Robinhood traders apparently took control of the stock, sending it on a roller-coaster ride. However, those same traders demonstrated that they tend to lose interest in stocks rather quickly.

They sent GME stock to a breathtaking 52-week high of $483 in January 2021, only to let it retreat to $40 and change in mid-February.

Here we have an example of how difficult it can be to profit from meme stocks. Your timing would have to be excellent, as these stocks can fall just as fast as they rise.

GME stock had another massive run-up in March, and then a third rally in June. There’s really no way to predict if and when the next melt-up will take place.

So far, the primary resistance point appears to be the $300 level. Therefore, if you choose to buy GameStop shares, you might consider taking profits at that price point.

As of July 9, GME stock was trading at around $193. At the same time, GameStop’s trailing 12-month earnings per share was -$1.78.

Don’t Hold the Bag

I mentioned the negative EPS because it indicates that GameStop still isn’t a profitable business on a per-share basis.

That’s problematic for value-focused investors – especially when the share price has gone up hundreds of percentage points over the past year.

Not long ago, I suggested that GME stock might continue to rise due to the greater fool theory.

In other words, some folks might continue to buy the stock based on the belief that even if the valuation is unreasonable, some other trader out there will still buy it at a higher price.

That’s like playing a game of musical chairs, though. At some point, the music will stop and you might be the one left holding the bag.

Or more accurately, you’d be holding a stock that represents a company with a few good points, but also some not-so-good ones.

Facing the Facts

Let’s start with the good news. For the first quarter of 2021, GameStop posted a net sales increase of 25.1%.

Also, GameStop recently announced the continued expansion of its North American fulfillment network, and company’s entry into a lease of a 530,000-square-foot facility in Reno, Nevada.

That facility is expected to be operational in 2022. So, we can put that in the “positive news” column.

On the less-than-positive side, GameStop reported some disconcerting stats for 2021’s first quarter:

  • Net loss of $66.8 million
  • Operating loss of $40.8 million
  • Adjusted EBITDA showed a loss of $0.7 million
  • Gross margin declined by 180 basis points on a year-over-year basis

Moreover, GameStop is “continuing to suspend guidance at this time,” which isn’t what cautious investors should want to hear.

The Bottom Line on GME Stock

Could GME stock pop again, at any given moment? Sure, it’s possible, but it could also drop without warning.

A balanced perspective will show that there are both positive and negative aspects to GameStop right now.

But in the final analysis, the positives aren’t enough to justify the share price – and you don’t want to be the “greater fool” in this scenario.

On the date of publication, David Moadel 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.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


Article printed from InvestorPlace Media, https://investorplace.com/2021/07/mixed-fiscal-data-suggests-gme-stock-gamestop-is-still-vastly-overpriced/.

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