As investors, we need to be careful that we don’t treat noise as true parameters. GameStop (NYSE:GME) announced that it is executing a four-for-one stock split to lower its stock price and keep it accessible to its retail investor base.
According to Michael Pachter of Wedbush Securities: “GameStop management knows that they have a 100% retail shareholder base and so, they are catering to them.”
GME stock acted wildly post-announcement, rising by more than 6% in Thursday’s pre-market. However, as the stock is still fundamentally overvalued, many investors run the risk of buying into a fad. As such, I will outline GME stock’s fault lines so that market participants can make an informed investment decision.
What a Stock Split Means for GME Stock
GameStop’s stock split won’t have any economic bearing on investors as they’ll receive additional shares to compensate for a reduced GME stock price. Nonetheless, the company’s stock split could alter GME’s market-based performance. According to an abundance of recent financial literature, a stock split could yield an annual excess market return of approximately 12.15% in the succeeding three years.
Although market research tells us that GME’s stock split could yield excess returns, we can’t look at the event in isolation as GME stock faces an array of headwinds. For one, GME is a high-Beta stock, meaning that it is exceptionally susceptible to risk aversion during bear markets.
A Fundamental Analysis of GME Stock
GameStop could face receding video game sales. Recent industry data showed that video game sales slid by 19% in May, reaching a 24-month low. The industry’s May results come after an 8% decrease in April, conveying that a downward sales trendline has formed. The industry’s systemic decline is multifactorial, with pandemic re-openings, lightened core consumer spending, and supply-chain glitches all playing a part.
GameStop’s first-quarter earnings report embodies its sensitivity to a softening industry as it missed its earnings target by six cents per share. GameStop’s hardware sales during the quarter amounted to 48.9% of its total revenue mix and its software sales comprised 35.1% of the company’s top line.
Although GameStop has formed numerous new business relationships and expanded into the non-fungible token space, much of the company’s new ventures are growth stories, lacking the necessary substance to suggest that they’ll overturn the company’s organic business slowdown.
Verdict on GME Stock Price
There is no need to overthink things here. GME stock is overvalued. For example, the stock is trading at 1.44 times its sales and 6.11 times its fair book value. Additionally, GME stock growth metrics don’t exhibit numbers that justify its overvalued status. For instance, GME’s revenue growth underscores the industry median by 36.29%. Moreover, its gross profit margin is razor-thin at 21.53% and its CapEx has retreated by 14.68% in the past year.
GME stock is a strong sell!
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.