- Gamestop (GME) stock is likely to decline after the current overheated rally.
- The stock can still be profitable in the long term if revenue growth stays consistent.
- But investors should avoid buying GME stock due to the high short-term risk.
Gamestop (NYSE:GME) stock is one of the most volatile assets you can buy. The standard deviation (SD) of GME is 7.76, which is way above the national average of 2.64. To explain how volatile this is, even cryptocurrencies — which are considered highly risky speculative assets — have a lower SD than GME. The SDs of Bitcoin (BTC-USD), Ethereum (ETH-USD) or even Dogecoin (DOGE-USD) are 3.99, 4.57, and 5.94, respectively.
Before the short squeeze, Gamestop’s revenue was over $6.4 billion, and it faced a quarterly revenue decline of 28.37%. Despite the losses, GME was undeniably undervalued. It had a ridiculously low market capitalization of just $180 million in March 2020.
However, due to volatility, Gamestop has been in muddy waters since the short squeeze. After GME closed at its all-time high of $347.51 on Jan. 27, 2021, the stock saw little to no stability. Through multiple ups and downs, it has declined more than 52% to its current price of $151.
| GME | Gamestop | $150.23 |
The Long-Term Bull Case for GME Stock
Volatile assets such as GME are challenging to forecast using conventional equations. Thus, an investment in Gamestop is extremely risky in the short term.
However, the long-term prospects for GME have started to make a turnaround. As I’ve mentioned before, Gamestop’s revenue was declining quickly. Its revenue growth fell for eight consecutive quarters before the short squeeze.
The short squeeze came as a blessing for Gamestop, as it attracted a lot of attention from the media. For example, the first-quarter sales in 2021 jumped by 25%. Two quarters before that, the revenue had seen a -30% quarterly decline, which improved to just -3.28% the next quarter.
Even more surprisingly, the quarterly revenue growth has sustained itself and picked up momentum. The last three quarters saw a positive growth rate of 25.07%, 25.58%, and 29.05%, respectively.
The revenue growth rate is one of the most critical of the factors that determine the value of a company. For example, Tesla (NASDAQ:TSLA) and Snapchat (NYSE:SNAP) have among the most conventionally overvalued market caps in the stock market due to their high revenue growth.
Thus, if Gamestop manages to sustain its current revenue growth rate, it can certainly be profitable in the long term.
The Long-Term Bear Case for Gamestop Stock
The biggest concern for Gamestop that could hurt its long-term prospects is its net revenue. The overall revenue is undoubtedly doing great. However, the company still makes a loss when you count in all the expenses.
In addition, there are no signs of a significant turnaround in net revenue. Analysts still expect Gamestop to remain an unprofitable business in 2022 and expect a slight rebound in 2023 of $35 million. One should note that $35 million is still a tiny amount of profit for a company the size of Gamestop, and slight variations can turn even 2023 into a loss.
The charts also don’t paint a very good picture for Gamestop. Despite the sudden jumps in price, GME has been in a long-term decline. After the short squeeze, the subsequent price spikes have been lower and lower. A continuation of this pattern is a cause for concern.
Moreover, suppose Gamestop does not stabilize and continues to bear the reputation of being a meme stock. In that case, most institutional and experienced investors are likely to avoid it in the future as well. As an example, the institutional ownership of GME is 26.34% compared to the market-wide average of around 80%.
Should You Buy GME Stock?
I believe that it is not a wise choice to buy GME stock right now. Gamestop stock spiked by 142%-plus in just two weeks, and the chances of there being a significant correction are very high.
I estimate GME stock could decline around 35% in the short term by looking at previous spikes. Thus, if you still wish to invest in Gamestop, you should do it only after a significant correction. Even then, I suggest that you only invest money that you can afford to lose.
On the date of publication, Omor Ibne Ehsan 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.
