Now that video game retailer GameStop (NYSE:GME) isn’t a frequent target of short-squeeze traders anymore, GME stock will probably rise or fall based on the company’s fundamentals.
Unfortunately, GameStop’s strength and soundness as a business venture is questionable. In the final analysis, the risk-to-reward balance doesn’t justify an investment in GameStop.
It’s notable that GameStop Executive Chairman Ryan Cohen recently purchased around $10 million worth of his company’s shares.
Does he see something that GameStop’s critics don’t? Maybe, or maybe not. All we can do is provide you with the facts and let you make your own decisions – and in the case of GameStop, the facts aren’t particularly encouraging.
The Bull Case Isn’t Strong for GME Stock
We’re assigning GME stock a “D” rating instead of a straight-up “F.” This doesn’t mean we’re recommending an investment in GameStop.
However, to be fair and balanced, we must acknowledge Cohen’s large share purchase, as well as the fact that GameStop posted an unexpected profit in the fiscal fourth quarter of last year.
It’s not difficult to identify red flags with GameStop. The company’s fundamentals are far from perfect, as GameStop swung back to a net loss in the fiscal first quarter of this year. Not only that, but GameStop’s sales declined on a year-over-year basis.
It’s also alarming that GameStop’s management canceled the company’s post-earnings conference call for the most recently reported quarter. It’s typically a bad sign when a company does that.
Speaking of bad signs, certainly it’s unsettling that GameStop fired its chief executive. The company has had five CEOs and three chief financial officers (CFOs) during the past five years, according to Jefferies analyst Andrew Uerkwitz.
GameStop’s Giveaways Suggest Desperation
Perhaps there’s a connection between GameStop’s high executive turnover rate and the company’s flagging fundamentals. As we already mentioned, GameStop reported declining year-over-year sales. Now, the company is trying out a sales-boosting tactic that seems desperate.
Several different sources report that GameStop is running promotions in which shoppers can get free games by purchasing games. Maybe it’s “buy one, get one free,” or maybe it’s “buy two, get one free.”
Either way, it looks like GameStop is willing to give away games, possibly including some brand-new ones, just to get the company’s sales up.
Let’s not mince words here. Retail businesses don’t give away expensive products because they want to. They only do this because they feel like they need to, in an attempt to boost sales and get loyal repeat customers.
Clearly, GameStop’s sales aren’t stellar and the company’s management are turning to old-school strategies, but there’s no guarantee that this will have the desired effect.
The GME Stock Bullish Thesis Falls Short
Waiting around for another GameStop short squeeze isn’t a sensible investment strategy. What matters now is GameStop’s strength or weakness as an ongoing business venture.
GameStop’s high C-suite turnover rate and declining sales are notable problems. GME stock gets a “D” rating because the negatives greatly outweigh the positives. So, even if Cohen is a buyer, most stock traders shouldn’t be too eager to buy GameStop shares now.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
