Meme stock king GameStop (NYSE:GME) is rallying once again. GME stock surged as much as 36.5% to $225 in heavy trading on Aug. 24.
Coming into 2021, the shares had shed a third of their value over the previous five years. Now the stock has a one-year return of 2,550%.
Astoundingly, despite the shares’ occasional ups and downs, they have held onto their gains, with the Reddit army declaring victory over the powerful hedge funds that are betting against the embattled videogame retailer.
In many ways, GameStop has become a symbol of defiance against Wall Street. One cannot understand that sentiment by simply analyzing financial statements. Instead, the action is happening on message boards. Keeping that in mind, how should investors approach GME stock?
On the one hand, there is a clear divorce between GameStop’s fundamentals and the valuation of GME stock. But going against Reddit this year has been like playing Russian Roulette. Every time you think GME stock is toast, it recovers. Welcome to the world of low-fee/no-fee stock trading.
I believe that those who own GME stock at this point can take profits in the name. And investors who have a position in the name should wait for the stock to drop before buying the shares. Right now, the shares are too high to buy.
The bigger question is whether the Reddit phenomenon will end anytime soon. I would have to say that it will not. Even though the stimulus funds are drying up, there is very little chance that Redditors will be confined to the annals of investment history.
The Ryan Cohen Factor
Everyone agrees that GameStop’s e-commerce strategy will be a key determinant of whether its shares can hold onto their astronomical gains. GameStop Chairman Ryan Cohen, known as “Papa Cohen” by many GME stockholders, is spearheading its e-commerce initiatives.
Cohen previously served as the CEO of Chewy (NYSE:CHWY), the pet e-commerce company that he founded when he was just 25 years old. In 2017, he sold Chewy to PetSmart in a $3.3 billion deal in order to pursue other interests. He then purchased a substantial amount of Apple (NASDAQ:AAPL) stock and became the latter company’s largest individual shareholder, holding around 6 million split-adjusted shares.
Cohen also became the largest single owner of GME stock, snapping up 10% of the shares and subsequently increasing his stake to roughly 13%. Incidentally, all of this occurred before the short squeeze of GameStop began in late January 2021.
Retail investors see “Papa Cohen” as an ally inside the company. He understands the importance of Reddit and is making sure the stock’s popularity among individual investors does not wane on his watch.
For instance, he opposed an idea floated by board members’ to issue $100 million of equity due to concerns over what that would do to the value of GME stock. And Cohen recruited Chewy and Amazon (NASDAQ:AMZN) alumni to become senior managers at GameStop, a move seen favorably by Redditors.
“Papa Cohen” is a key reason why retail investors have placed their trust in the videogame retailer this year.
Cohen has laid out an aggressive e-commerce strategy for GameStop. He is working on accelerating its e-commerce growth, adding more product categories, and creating a high-quality experience for customers.
The approach seems to be paying dividends. GameStop’s global e-commerce sales climbed 175% in its fiscal fourth quarter year-over-year even though its net sales decreased YOY.
Its 2020 net sales dropped to $2.122 billion compared to $2.194 billion in 2019, but its Q4 digital sales jump was the most important data point. Remember, retail investors will use any post or press release that is even remotely positive as an excuse to double down on GME stock.
As GameStop continues to pivot towards e-commerce, many press releases are emanating from the company regarding its new initiatives and partnerships. Those will be short-term, positive catalysts for the stock.
Only time will tell if the company will have the ability to take a significant slice of its market. But expect the stock to keep popping in the meantime on any positive news.
Do Not Short GME Stock
If there is one thing Wall Street has learned over the last year, it’s that retail investors are a persistent bunch. Every time the marquee Reddit stocks seem down for the count, they come roaring back.
Under these circumstances, it becomes quite difficult to bet against meme stocks because those doing so will lose money. So the best strategy for GME stock is to open a small position in the name and keep booking profits at regular intervals when short-term catalysts boost the price.
The company can meaningfully revamp its operations. What’s more, its strategy and the cash on its books will allow it to begin a turnaround.
But its volatility might be too hard to stomach for most investors. Remember the golden investment rule that you should always keep in mind: Never invest money you can’t afford to lose.
On the publication date, 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 in 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. Faizan does not directly own the securities mentioned above.