Usually, it’s never a great sign that a chief operating officer quits your organization with less than one year on the job. Yet the famous (or infamous) meme trade GameStop (NYSE:GME) shrugged off the bad news. Or to be more precise, investors in GME stock didn’t place much emphasis on the announcement.
How else do you explain the Monday jump of 9% following the start-of-the-weekend disclosure?
With one fell swoop, the meme army confirmed that nothing will get in the way of its favorite battle cry. Surely, GME stock has faced worse crises. For long stretches, shares were trading in single-digit territory as onlookers questioned whether GameStop’s dependence on physical stores could be sustained amid radical changes – namely, downloadable content – in the video game industry.
Additionally, supporters took on Wall Street hedge funds, who saw an “easy” opportunity to basically take down GME stock to zero – what many bears see as its intrinsic value. In a world of word processors, GameStop had the appearance of a door-to-door typewriter salesperson. Fundamentally, it was difficult to argue against the big institutional players.
But through coordinated trading intensified through a morality play – GameStop is a millennial favorite harkening to strong childhood memories – the little guy took on the giants and won. A meme was born and GME stock became a phenomenon of its own.
Still, one has to wonder how long the show can go on. Enthusiasm is wonderful but like any professional sports coach will tell you, it’s not enough. To win and win consistently, your organization has to have talent, resources and a cohesive structure that incentivizes development.
If enthusiasm and good fortune is what drives GME stock, those attributes will eventually run dry.
Is There Enough Love for GME Stock?
As someone who has benefited handsomely from an earlier wager on GME stock, I’m not going to bash the underlying company. But as valuations went berserk, I took profits and am now in an enviable position playing with house money. In other words, I’m a realist.
And realistically, it’s difficult not to have some concerns about GME stock. No doubt about it, losing your COO isn’t exactly like losing your CEO. At the same time, that’s not an unimportant position. Further, GameStop recruited the executive in question, who previously held leadership roles at Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
But that might be a smaller portion of GameStop’s potential woes. Mainly, the “monster” that it created – rampant speculation on questionable investments – may be coming to an end.
Despite strong economic data on paper, people forget that we just incurred a massive crisis. Thus, we don’t have a paradigm-shifting catalyst to necessarily justify the move higher in GDP. Instead, the superficial aspects of wealth that we see are largely just wealth transfers. But at some point, the masses no longer will have enough capital to support lofty valuations for everyone.
If you look at GME stock, you’re witnessing declining returns on investment on subsequent rallies. While this fading ROI is occurring, you’re seeing investment dollars pile into other speculative ventures, such as cryptocurrencies. Coincidence? Maybe but the fact remains that the meme army cannot raise all boats: it has to pick winners and losers.
That’s why I’m hesitant on GME stock at the moment. At its current price tag of $200, it would need to rise to $400 just to do a 2x move. If you’re an early believer in GME, a 2x move is really nothing.
On the other hand, meme cryptos are routinely doing 2x moves overnight. GameStop simply lacks the excitement it once generated, indeed originated.
If You Must Trade, Trade Responsibly
To be honest, I’m probably too jaded and disgruntled with these meme plays to interest those who are bullish on social media-driven trades. Therefore, take my ideas about GME stock with a grain of salt.
At the same time, because I’m so jaded, I’m no longer affected by the emotions of meme stocks. And maybe that’s what we all need, some honest reflection in what has been an unprecedented year.
My contention isn’t that GME stock doesn’t have upside potential. It’s just that after everyone has gotten used to 30x gains or whatever, anything substantially less will be deemed unimpressive. Such thinking shifts risk capital away from used-up meme stocks like GME to other riskier ventures. Thus, buying into GameStop following a 9% move higher is more dangerous than you might think.
On the date of publication, Josh Enomoto held a LONG position in GME. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.