GameStop (NYSE:GME) stock continues to do what it does. Its allure lies in the chance at outsized gains rooted in no fundamentally sound argument.
That’s basically what’s been true of GameStop for a long time. Well, since January of this year anyway. That’s when it suddenly burst into prominence.
One thing to understand about GameStop is that the gains might not be what some investors assume them to be. To understand what I mean, let’s go all the way back to the start of the phenomenon.
Initial Explosion Favored Few
When GameStop exploded back in January, investors naturally wanted to know how much value was created. From a market capitalization perspective, the answer was roughly $20.4 billion within the first month.
Millionaires were minted overnight. Small investors made a lot of money, and an alluring headline emerged. The little guy was indeed capable of making returns on par with what institutions regularly see.
But what gets lost is the fact that of that $20.4 billion, $16 billion of the gains went to 9 individual investors. Among them was Chewy (NYSE:CHWY) co-founder Ryan Cohen. His story is pretty amazing in the context of GameStop’s rise to prominence. But the point I’m making is that it’s worth noting that GME stock isn’t precisely bringing the power back to the people as evidenced by the distribution of those early returns.
We simply don’t hear about the smaller investors who jump in and fail miserably. They don’t show up in Wall Street Journal headlines. And I’d also speculate that they are much less likely to share their pain on the echo chamber of r/wallstreetbets.
Whether we hear their stories or not, the truth remains that three-quarters of the early gains went to a select few. Kudos to them, but I’m simply making the point that $4 billion divided many ways is a far less compelling hook.
Ryan Cohen, though, is a great headline.
Incredible Rise
He went from 12% shareholder to essentially running the company. He was offered a position on GameStop’s board of directors back in 2019, before everything interesting about the company occurred.
Cohen declined that offer. Ultimately he inserted himself by degrees into the company’s decision making. He’s become a folk hero for meme stock followers. But as interesting as his rise has been, it’s necessary to divorce your investment from his narrative.
Again, he has been one of the select few to benefit on a massive scale from GameStop. And at the end of the day, GameStop remains fundamentally flawed.
The promise of Ryan Cohen is that GameStop will reinvent itself into a more digitally savvy, e-commerce dependent entity.
In turn, sales will rise. But that has yet to show any signs of materializing.
Growth Projections for GME Stock
GameStop isn’t expected to grow from a top line perspective. Analysts project that the company will record $5.67 billion in revenue this year, and $5.54 billion next year.
Increased digitization of GameStop ostensibly leads to greater margins over time. That’s a clear bottom-line argument in favor of a digital strategy for the brick-and-mortar game company.
But current projections suggest that top line growth simply isn’t to be expected for more than a year.
Do you think that traders boasting about their gains on r/wallstreetbets will be enough to keep GME stock relevant for another year? Perhaps it will, I don’t know. But at some point, investors will have to come to grips with the fundamental truths behind GameStop.
If Cohen doesn’t fundamentally improve GameStop, then what separates his massive gains from other Wall Street successes that r/wallstreetbets despises? I would say it’s just more of the same packaged slightly differently in that case.
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 InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
