Grapevine, TX-based GameStop (NYSE:GME) is a global operator of video game retail stores, with an online presence as well. The company focuses on the U.S. market, but has presence in Canada, Australia and Europe under other banners, selling a range of gaming products as well as other collectibles and technology at its locations.
That said, it’s become increasingly clear that meeting consumers where they are is the most important. With gamers increasingly buying their games and accessories online, it’s unclear what unique competitive advantage GameStop has long-term. This is the key thesis behind why the stock has declined of late.
That said, let’s dive into a few more reasons why GameStop appears to have more room to decline, and why this meme stock is one worth avoiding.
Disappointing Financials
Despite seeing incredible recent surges tied to hype around Keith Gill’s return to social media and expectations of another short squeeze, these recent pops have been short-lived. In fact, any sort of speculative buying frenzy has seemed to die down quicker than the one before it, with GME stock losing steam much quicker this time around.
This week, the stock is down considerably as investors are clearly taking a more skeptical view of the company’s fundamentals. GameStop’s Q1 2024 sales declined to $882 million, driving a $32.3 million loss. According to analysts, GME is a sell, with price targets constantly downgraded due to lack of turnaround strategies.
GameStop’ core business of physical game sales faces severe challenges from the digital gaming shift. Revenue has been falling, and cost-cutting offers limited relief. Without a successful business model pivot, GameStop’s long-term outlook remains bleak despite occasional meme stock-driven surges.
Highest Price In Over a Month
On July 16, GME stock reached a one-month high above $27 per share. Despite Roaring Kitty’s recent low profile and lack of commentary on the company, the stock rose 5% in a month and 2% that day, fueled by ongoing meme stock interest.
Of course, since this most recent pop, the stock has retreated. Currently, GME stock trades hands around $24 per share, with more downside likely ahead.
GameStop gained fame in 2021 when amateur traders drove its stock price higher, causing Wall Street turmoil. The stock quieted down but surged in May after Keith Gill (Roaring Kitty) tweeted a meme and again in June following his first livestream and share purchase in three years.
Roaring Kitty’s silence led to a sharp drop in GME, though it gradually rebounded last week. Investors remain interested in risky assets, especially after the weekend’s political turmoil. However, with strong anticipation building around Kamala Harris, it appears a number of top Trump-related meme stocks have underperformed of late.
GME Stock Still Looks Like a Loser
GameStop’s underlying business remains troubled with Q4 sales dropping 28% to $882 million and net losses matching forecasts. CEO Ryan Cohen has capitalized on the situation, raising $933 million from stock sales, boosting GameStop’s cash reserves to nearly $2 billion. While this prevents immediate bankruptcy, it also dilutes shareholders in a big way. With over 306 million shares outstanding and authorization for up to 1 billion common shares, further dilution is possible.
GameStop faces challenges as digital gaming reduces the need for physical game retailers. With a valuation of $11 billion, its market is shrinking. While niche demand exists, GameStop is better suited as a trading stock than a long-term investment. Thus, this is a stock to avoid right now, in my view.
On the date of publication, Chris MacDonald did not hold (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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
