Struggling video game retailer GameStop (NYSE:GME) is one of the original “meme stocks.” Trading below $5 for much of 2020, retail investors on Reddit’s r/WallStreetBets forum talked up GME stock in early 2021 to the point that it closed at $347.51 on Jan. 27.
The following months were extremely volatile, marked by crashes and spikes. However, for the past month GME shares have been relatively stable, although they have lost some ground.
With GME stock currently trading at $179, where is it going next? Should you consider adding shares to your portfolio?
Let’s take a closer look.
Recent Holiday Quarters Have Been Disappointing
For retailers like GameStop, the holiday sales quarter is a big one. Knowing that, it might be reasonable to expect a positive market reaction is coming for GME stock in the near future. However, it’s a little more complicated than that.
Over the past several years, this company hasn’t made a great impression with its holiday numbers. Last year, net holiday sales of $1.77 billion were down 3.1% year-over-year. That’s despite the fact that consumer spending rose 8.3% over the holidays, as shoppers opened their wallets in an attempt to forget about the pandemic.
When shoppers were spending far more money than predicted, why did GameStop see its holiday sales slide? The company released a list of reasons: “strong console demand was offset by store closures under the Company’s planned de-densification strategy, temporary store closures mandated by local governments due to COVID-19, and industry-wide limited supply of new gaming consoles, and supply chain constraints broadly.”
Those holiday 2020 numbers were down from the 2019 holiday quarter, which was a complete disaster for the company. That year, sales for the crucial 9-week period were down 27.5%.
In both cases, the market shrugged when those holiday numbers were released. A week after the holiday 2020 numbers were released, GME stock rocketed to meme stock fame.
What Will Happen With GameStop This Holiday Season?
What’s in store for GameStop this holiday season? Temporary store closures probably (hopefully) won’t be an issue this year. However, supply chain issues are still a problem. A continued shortage of semiconductors has been bad news for console sales, with the PlayStation 5 and Xbox One X still seeing constrained availability.
Game sales dried up in advance of the pending release of new consoles — a part of the 2019 holiday quarter story. Now that millions of gamers have one, sales are picking up, but there’s a catch.
This generation of consoles can still play physical copies, but few discs are being sold. At this point, 71% of PlayStation 5 games sold are digital downloads. GameStop can sell gift cards to buy those games online, but gift cards don’t have the margins physical copies do. As such, GameStop loses the opportunity to re-sell discs that players trade in.
I don’t think anyone is expecting GameStop to report stellar holiday sales. Or even holiday sales that hold their own compared to last year. Is that going to be an anchor on GME stock? Probably not. At least based on the experience of the past few years.
Bottom Line on GME Stock
That brings us to a key question: does GME stock deserve a place in your portfolio?
It earns a B-rating in Portfolio Grader. The company did post significant revenue growth in its latest quarter. It has opened a new 530,000 square foot fulfillment center that gives it coast-to-coast delivery capability. And GameStop has $1.78 billion in cash and restricted cash, with virtually no long-term debt. At $179, shares remain well off their $347.51 close on Jan. 27.
However, on the other side of the equation, we have the few investment analysts tracked by the Wall Street Journal. There are only four of them, but their consensus rating for GME is “Sell.” Their average 12-month price target of $71 is not pretty given GME’s current value.
At the end of the day, whether you invest in GME stock for its long-term growth prospects depends heavily on one thing. Do you feel the company’s strategy of reducing physical stores, pushing e-commerce and expanding its product offerings will truly pay off?
Just be prepared for some nonsense in the meantime. Remember, GME is the classic meme stock. That means volatility is inevitable.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (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.
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