More than seven months after it made Wall Street history, GameStop (NYSE:GME) stock still manages to punch above its weight. That is, it’s still trading at a price leaps and bounds above the underlying value of its video game retailing business.
Sure, there’s the potential for its e-commerce transformation, spearheaded by its chairman, Chewy (NYSE:CHWY) co-founder Ryan Cohen. Yet that’s not what’s keeping it at today’s prices (around $212 per share).
At best, its e-commerce potential gives it a maximum valuation of between $50 and $100 per share.
So, if not its e-commerce catalyst, what is keeping the stock at low triple-digit prices? Its meme stock blue-chip status. Only one other name holds this status: AMC Entertainment (NYSE:AMC). Both were the original meme stocks. Both have also remained at the top of the stocks most talked about on Reddit’s r/WallStreetBets subreddit. Other meme favorites have moved up and down the list, and/or have boomed and busted. These two have also seen their own respective ebb-and-flow.
Yet it likely won’t be until the meme stock trend goes the way of the pet rock that both names finally collapse in price. So, should you buy given the music hasn’t stopped? Not so fast. The exact time it happens is tough to handicap, as it’s still a matter of when rather than if.
Even so, with risk/return out of your favor, it’s best to stay away.
The Game Hasn’t Stopped Just Yet for GME Stock
You can argue that GameStop’s valuation is not reflective of its underlying value until the cows come home. Will it have an impact on its future price action? Likely no. It may not move as strongly on hope, hype and momentum as it did a few months back.
Yet GME stock still trades divorced from its fundamentals. As Seeking Alpha recently put it, there’s been no sign of “Reddit fatigue.” Traders are getting excited for it again ahead of its next earnings release on Sept. 8, but not so much do to with the results themselves.
Instead, the excitement is about the company possibly generating enough positive earnings that quarter to outweigh losses from its three prior fiscal quarters. If that happens, GameStop may meet the criteria for inclusion in the S&P 500. Inclusion could give shares a further pop, as is commonly seen with stocks added to an index.
Now, before you run out and buy this, keep a few things in mind. One, it’s questionable whether results from this quarter will bring it completely out of the red for the trailing 12 months. Second, the S&P index committee isn’t required to add a new stock just because it meets all the criteria. It could reject it, due to its valuation built on its meme stock status rather than its fundamentals.
Despite Resiliency, Why You Don’t Want to Buy it
Even if the S&P inclusion angle runs out of steam, don’t expect GME stock to start tumbling in the immediate future. Until the market sees a correction that scares off much of the retail money and causes meme stocks to sink to a greater extent than stocks overall, both this stock and AMC stock will likely stay resilient.
To some, this may mean it’s not too late to profit. However, it’s not a gamble worth making. Yes, we haven’t seen markets get volatile again. So far, an increasingly unstable world hasn’t stopped the market from making new highs. Nonetheless, it’s too early to say it won’t happen.
The Federal Reserve may remain dovish. It may take time for Fed tapering and interest rate increases to play out. Other looming issues, though, could have an impact. Be it the outbreak of Covid-19’s Delta variant, slowing economic growth, or issues with inflation that may not get resolved as long as the Fed refuses to raise interest rates.
If a correction happens? It’ll likely hit meme stocks the hardest. Even GameStop. If markets get rocky, the newbie investors not used to a bear market could panic sell, sending GME stock to substantially lower prices. A move down below $100 per share seems possible.
The Bottom Line
GameStop will likely continue to trade at inflated prices until the trend that sent it “to the moon” finally fades. For the time being, this may mean shares hold steady. Or perhaps move higher, while the S&P inclusion catalyst remains on the table. Even as this is the case, still avoid it.
Putting it simply, possible gains from here with GME stock pale in comparison to the potential losses that could be seen once the music stops.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
