The Hammer May Not Fall on GameStop Stock for Quite Some Time

Like many others who followed the Reddit-fueled surge in GameStop (NYSE:GME) stock, I was taken aback by the initial price action.

Photo of the Gamestop (GME) logo On a Mobile Phone.
Source: Shutterstock / mundissima

A down-on-its-luck stock appreciating many times over is not something you see every day, but now that it’s been a few months since the phenomenon started, it is more astounding to see investors are holding firm after heavy losses.

GME stock is down nearly 24% in the last month, but there have been several times this year when analysts and investors were convinced the GME rally was over. Improbably, shares have held somewhat steady with a support level between $130 and $160.

Adding fuel to the fire is GME’s quest to become an important e-commerce player. Considering the news-sensitive nature of meme stocks, any positive PR can have a massive impact on GME stock. So, even though there is a huge difference between the fair value and current price, you should think twice before shorting this one.

The current attitude on r/WallStreetBets is rooted in something more philosophical than hard-nosed technical or fundamental analysis. Users on these platforms believe they are winning their war against short-sellers and are saving thousands of jobs in the process. They hope the momentum they create will help reduce the advantage institutions have over retail investors.

Against this backdrop, it becomes challenging to predict where GME could end up in the long run. However, all signs point to the rally continuing with peculiar peaks and valleys in the near term.

Providence Is Wiser Than You

The speculation fervor behind GameStop led to a swift rise to the stratospheric levels of $480 per share in January. The sentiment has cooled off a bit, and the stock is trading a shade above the $165 price level, a 65.63% decline from the all-time high during the height of Reddit mania.

Although it is a steep price correction, GME stock remains highly overvalued considering its recent financial performance and growth prospects, but there is no valuation model out there that can comprehensively incorporate the underlying factors powering the stock price.

At the same time, it is also important to acknowledge GameStop’s management and its efforts to turn around its fortunes. It recently hired two experienced hands from Amazon (NASDAQ:AMZN), Matt Furlong as its new chief executive and Mike Recupero as chief financial officer. Alongside Ryan Cohen, these executives are busy laying the groundwork for an expansive e-commerce strategy.

We are slowly starting to see traction on this end. It will take some time for all the pieces to fit together, but GME is making all the right moves to become a significant e-commerce player.

The company has started to expand its fulfillment centers, with a 530,000 square foot facility in Reno and a 700,000 square foot facility in York, Pa.

On a separate but equally important note, GameStop ended 2020 with $216 million in long-term debt. Earlier this year, the company announced plans to retire senior notes due in two years, leaving it debt-free. And in the last three months, the retailer sold 8.5 million shares at an average price of around $197 and raised a whopping $1.677 billion.

Where Is GME Stock Headed?

Considering all these aspects, GME is in an excellent position to make its e-commerce pivot. Reddit loves the recent moves by the company, and much like AMC, you get the feeling management is conscious of the new investors when tackling administrative challenges.

Chairman Ryan Cohen has acknowledged the importance of Redditors during a talk at the retailer’s annual meeting, “We’re fortunate to have such a special group of investors holding the company’s shares, you guys inspire us to think bigger, fight harder and work longer each day.”

GME and AMC (NYSE:AMC) have an iconic status among Redditors, and stock prices have remained at elevated levels with the possibility of a short squeeze looming.

I do not foresee that changing anytime soon. Retail investors now account for 45.1% of total ownership in GME. A few major institutional investors remain in the mix, such as Blackrock (NYSE:BLK), which owns 12.36% of GME stock, but ultimately, the reigns are in the hands of Redditors.

Despite a massive outflow of institutional capital in the second quarter, the stock price has remained steady. Astoundingly, the short percentage of float stands at 27.2%, which is not has dropped significantly from 41.96% in January. Again, this has not significantly impacted the price, underlining GME’s status as a Reddit favorite.

Only One Reason to Stay Invested

If you are invested in GME stock, then Reddit support is perhaps the only factor that will give you solace. Although Wall Street may not agree with their methods, there is no denying the power of Reddit in inducing market moves for companies like GME.

Under these circumstances, it would be folly to short GME stock.

It is also worth noting that GameStop is in turnaround mode. For years, there was talk the company could be the next Blockbuster, the video-store chain that went bankrupt. However, the company now has a clean balance sheet and a significant amount of cash.

More importantly, it has the vision to transform from a brick-and-mortar retailer into an e-commerce marketplace. A positive press release or better-than-expected earnings numbers will inevitably push the stock upward, with Redditors waiting in the wings to protect their investment.

If you want to trade this one, it is better to keep a close eye on the message boards and make sure you are in sync with the general trend, but do not count this one as a long-term investment.

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.


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