Video game retailer GameStop (NYSE:GME), along with global movie-theater chain AMC Entertainment (NYSE:AMC) and a handful of other companies, are the talk of Wall Street again. It feels like 2021 all over again, but that’s not necessarily a good thing for sensible investors. After delving into the company’s financial facts, you’ll hopefully be convinced to stay away from GameStop stock.
If you’re a day trader who flips GameStop shares for a quick buck, that’s a different story entirely. My message is for serious, sensible investors. Seeking multibagger gains with meme stocks is a dangerous pursuit, and getting caught up in the GameStop hype could cost you a lot of your hard-earned money.
What Goes Up Too Fast, Must Come Down
In case you missed it, GameStop stock catapulted from $18 to $64 in a few days during the middle of May. This occurred after meme-stock celebrity “Roaring Kitty” resurfaced on social media for the first time in several years.
It’s basically a replay of what took place in 2021 during the height of the meme-stock frenzy. Back then, investors who held on to their GameStop shares for too long were punished in 2022, 2023 and early 2024.
In other words, you had to have great luck and timing to profit from that trade. The same thing could be said about this year’s meme-stock cycle. It’s following the 2021 playbook, as GameStop stock quickly dropped in the second half of May after rallying during the first half of the month.
I’d like to echo the wary sentiment of financial analyst and YouTuber Kevin Paffrath. He warned that buying meme stocks is “sort of like playing the lottery.” I agree, except I would replace “sort of” with “completely.”
A Reality Check for GameStop Investors
The post-rally drop in GameStop stock picked up speed on May 17, and there was a specific reason for this. On that morning, GameStop released its preliminary results for the first fiscal quarter, which ended on May 4, 2024.
There were a couple of major pain points in the preliminary results. First of all, GameStop expects quarterly sales of $872 million to $892 million. This represents a steep year-over-year decline when compared to $1.237 billion in the year-earlier quarter.
GameStop expects to report quarterly cash, cash equivalents and marketable securities of $1.073 billion to $1.093 billion. That range is markedly lower than the $1.31 billion that GameStop recorded at the end of the year-earlier quarter.
Along with all of that, GameStop prepared investors for an unprofitable first fiscal quarter. It’s yet another reminder that short-squeeze targets like GameStop aren’t always in great financial condition.
GameStop Stock: Don’t Play This Lottery
Paffrath’s lottery analogy might sound harsh, but it’s entirely appropriate. Investing in GameStop, as opposed to day-trading the shares, is akin to gambling. In 2024, as in 2021, you’ll need great luck and timing to achieve multibagger returns.
Before you take on too much risk, be sure to review GameStop’s financials. I hope that you’ll be persuaded to stay away from GameStop stock right now. It may be tempting to jump on the bandwagon, but the best policy is to just avoid the meme-stock lottery altogether.
On the date of publication, David Moadel 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.
