Last month, I argued that an upcoming stock split wasn’t a good reason to buy GameStop (NYSE:GME). Mainly, due to the risk that external factors would outweigh any split-induced boost for GME stock. Market conditions are no longer on the side of meme stocks.
The Federal Reserve continues to get more hawkish, tightening monetary policy to bring inflation under control. Speculative stocks are at risk of experiencing further downward pressure. Add in waning interest in meme stocks among retail investors, and what do you get? Most likely, lower prices ahead for the video game retailer’s shares.
On top of this, there may be something else that causes the GME stock price to drop: its upcoming earnings report. Expected to report earnings in early June, the market could react negatively to the numbers. Why? As my InvestorPlace colleague Faisal Humayun argued in April, video game sales are in a slump. With the boost from the pandemic long gone, last month video game industry sales were down 15% year-over-year.
This points to the company reporting worse-than-expected top and bottom line results. A weakening video game market also bodes badly for its e-commerce plans. If it becomes more apparent that cooling video game demand will affect its digital transformation efforts? It may become harder for GameStop to sustain its triple-digit stock price.
Once again, shares could fall back below the $100 per share mark. Put simply, a continued downward slide isn’t fully dependent on more market volatility. Updates from the company may end up being what knocks it down lower.
With this in mind, it doesn’t appear wise to buy now, on the expectation more progress on its stock split plans spark another meme wave. I’ll admit I may not be giving the stock split catalyst its due credit. After all, as one hedge fund (Bronte Capital) that is short GameStop has remarked, “not accepting that stock splits add value is a recipe for losing money.” Also, given that the shareholder vote on the split is set to happen around the time the company next reports results, you may argue that “meme news” could outweigh more substantial news.
You can point to how the stock performed in late March as evidence of this. First dipping on underwhelming earnings, shares surged on news of Chairman Ryan Cohen’s insider buying. However, it’s not a slam dunk there will be another relief rally during this time. Without one, it’s doubtful what played out in March will play out again in June. The approval of its stock split may fail to outweigh worsening fundamentals. In short, there’s little reason to hold GME stock going into the summer.
On the date of publication, Thomas Niel 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.
