At Some Point, GameStop Investors Will Heed This Simple Warning

There’s still little reason for anyone to own shares of GameStop (NYSE:GME) stock. Sure, highly risk tolerant investors have and will likely continue to make quick returns from the equity. 

Photo of the Gamestop (GME) logo On a Mobile Phone.

Source: Shutterstock / mundissima

But at some point, the shares’ bottom is going to fall out. There will be a mass exodus from the stock, and a lot of people will lose a great deal of money. 

Feel free to dismiss my opinion as simple negativity towards a meme stock. That’s fine. I’ll readily admit that I’m a conservative, fundamental investor.

Like another InvestorPlace columnist, Wayne Duggan, who compares GameStop to AMC (NYSE:AMC) in this recent article, I believe that neither stock makes much sense. 

Further, I wholeheartedly agree with his view that, by  investing in an index-tracking ETF instead of meme stocks, many young investors will be spared a great deal of heartache down the road.  

Going Down

GameStop isn’t a wise investment. And I believe that many young investors will be harmed by GME stock in the future. But how low could GameStop’s shares fall when they do falter? 

There are some very easy reference points readily available. Take, for example, the average price target of the four analysts with current coverage of GameStop. That mean price target sits at $71. 

However, if you believe that GameStop’s shares have a price bottom near $70, I’d think again. That average is pulled much higher by the simple arithmetic fact that one of the four analysts has given it a high target price of $190. 

Therefore, it’s much safer to assume that the $37 median price target makes much more sense. Indeed, that’s where GameStop’s shares traded prior to their initial spike in January. But perhaps the stock will sink back below $10. Who knows? 

So what besides GameStop’s meme-stock status is making me so pessimistic about the name?

Business Fundamentals

You have to understand that GameStop is a very overvalued retailer..  A look at GameStop’s price-sales ratio shows that it’s an unattractive stock. 

In retail, there is not a lot of room to add value. Retailers simply sell products and make profits on those sales. They don’t have a lot of brand value. In other words, customers simply look for retailers with the lowest prices.

As a result, investors aren’t willing to pay high price-sales ratios for retail stocks. In fact, P/S ratios remain low across the retail sector. 

In most cases, retailers can achieve a price-sales ratio of somewhere around 1.3. But GameStop’s P/S ratio sits above 2.1 right now . That ratio will come down at some point.

GameStop’s Sales Aren’t Rising

The curious thing is that GameStop’s sales aren’t expected to rise. Next year, analysts, on average, predict that the company will report $5.54 billion of revenue, down from the mean estimate of $5.67 billion this year. 

So there’s little reason to believe that investors should continue to overpay for GameStop’s revenues moving forward. Or at least there’s little reason to expect GME stock to soar going forwards.

This is, of course, the crux of fundamental analysis. And potential investors who have already made money from GME stock should consider these factors.

There’s every reason to believe that the stock’s run cannot last indefinitely. Be thankful for your profits and consider moving into a more fundamentally  solid stock. 

That’s what I’d do, but I’m a relatively conservative investor. 

On the date of publication, Alex Sirois 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 Publishing Guidelines.

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