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Don’t Expect a Short Squeeze Rally for GameStop

GME stock - Don’t Expect a Short Squeeze Rally for GameStop

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Just as Dogecoin (DOGE-USD) is the leader among meme coins and tokens, GameStop (NYSE:GME) is the name that triggered the famous meme stock trend. If I were an investor in GME stock during that phase, I would certainly not short anything with a short interest of nearly 19%. However, times have changed.

From a macroeconomic perspective, easy money is the time for peak speculative action in stocks or risk asset classes. With the Federal Reserve likely to pursue aggressive rate hikes through 2022, liquidity tightening will limit speculative action. The focus will increasingly shift to company-specific fundamentals more than any other factor.

Earlier this month, GME stock surged after announcing an upcoming stock split. Any significant increase in company valuation on a factor like this is perplexing. I would short a stock that rallies on a stock split if there are no other fundamental factors to support the upside.

Several sectors of the economy are readjusting as the Covid-19 pandemic evolves. As an example, sale of physical and digital video games, hardware and accessories have declined for the fifth consecutive month. Total sales dropped by 15% to $4.85 billion on a year-over-year (YOY) basis. If this decline sustains, GME stock will trend lower.

Another negative factor is GameStop is unattractive from a margin perspective. For the year ended January 2022, the company reported sales of $6 billion. However, operating-level losses widened on a YOY basis.

It also seems GameStop has been trying hard to maintain investor interest in the struggling video game retailer. In March 2022, the company announced it will be partnering with Immutable X (IMX-USD) to build on its non-fungible token marketplace. This is unlikely to have any significant impact on key margins.

If we look at analyst estimates, the sentiment seems bearish. Three analysts have a median price target of $87.70 for the stock. This would imply a downside of 31.8% from current levels of $126.50.

Overall, GME stock lacks positive catalysts and with industry sales weak, the markets will be disappointed.

On the date of publication, Faisal Humayun did not hold (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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

Article printed from InvestorPlace Media, https://investorplace.com/2022/04/dont-expect-a-short-squeeze-rally-for-gme-stock/.

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