The S&P 500 has fallen 5% or more in back-to-back weeks and has closed lower in 10 of the past 11 weeks. Despite this fact, GameStop (NYSE:GME) has not only avoided making a new 2022 low since March, but GME stock is actually higher by 78% from its March low. What in the world is going on?
Despite the recent performance, it’s my opinion that GameStop is not investable. The share price is far too volatile and the business does not seem worth the valuation that the stock commands today. Then again, the fact that Wall Street is still valuing GameStop with a $10.5 billion market capitalization in a bear market is both surprising and impressive.
As it pertains to an investor though, we need to think about future returns and the quality of assets. In that sense, I think there are many other better names available right now than GME stock.
| GME | Game Stop | $138.38 |
“Meme Money” Still in GME Stock
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While I do not believe that GameStop is a worthy investment, GME stock remains an excellent trading vehicle. Shares trade in a wide range, potentially allowing you to capture giant rewards.
The volatility that hurts investors is what rewards traders — provided that they can correctly time some of these moves. Looking at the chart, the levels are magnificently clear.
In March, GME stock bottomed around $78. Shares then more than doubled in just over two weeks as they ran to nearly $200. On the ensuing decline, GME stock narrowly avoided breaking the low, and shares eventually made their way back to over $100. Amid the current rally, the 61.8% retracement and the declining 200-day moving average have been resistance.
Let’s not forget that GameStop currently sports a peak-to-trough decline of 70%. That’s not unlike some of the declines we’ve seen in growth stocks at this point.
In any regard, the upside has been limited around the $150 area. If GME stock can clear this zone — as well as the 61.8% retracement and the 200-day moving average — bulls’ attention should shift to the $173 to $177 zone. There we find the 161.8% extension of the current range and the 78.6% retracement of the larger range. It’s a reasonable area to trim some exposure for those who are trading GameStop. Above that opens the door to the $200 area.
On the downside, $115 is key. A break below that puts $100 in play, followed by the $78 to $80 zone.
The Fun Is Over With GME Stock
At the height of the Reddit WallStreetBets spectacle, GameStop commanded a market cap of $24 billion. For an unprofitable retailer that did $6 billion in sales for its most recent fiscal year, that’s a silly valuation.
GameStop is piling into trending products as a way to save its business, including NFTs, blockchain, digital wallets and cryptocurrencies — all the hot buzzwords of the last bull market.
On the plus side, the company does have Ryan Cohen as its chairman, who is a co-founder and former CEO of Chewy (NYSE:CHWY). If Cohen can make GameStop the online video game marketplace — essentially the Amazon (NASDAQ:AMZN) of video games — then the company and GME stock have a chance at a long life. Otherwise, investors are paying a heaping premium for what is effectively a struggling retailer.
Analysts expect 7% revenue growth this year to $6.45 billion, but for GameStop to lose $5.37 a share. That’s after losing $4.56 a share last year. And forecasts call for it to lose another $4.10 a share next year.
From a cash flow perspective, the retailer burned $500 million in fiscal 2022 and has a trailing free cash flow deficit of roughly $720 million. Simply put, the business is not attractive here.
Better Investments Available Than GME Stock
If investors want to be in retail, why not Amazon, Target (NYSE:TGT), Costco (NASDAQ:COST) or Home Depot (NYSE:HD)?
If they want to be in gaming and/or tech stocks, why not Advanced Micro Devices (NASDAQ:AMD), Nvidia (NASDAQ:NVDA) or one of these stocks unaffected by inflation and macro headwinds?
Trading GME stock is certainly one thing — it is good for that — but from an investment perspective in a bear market, I see many other more compelling businesses on sale.
On the date of publication, Bret Kenwell held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
