Some retail traders are interested in GameStop (NYSE:GME) but haven’t conducted due diligence on the company, getting caught in the meme trend instead. It’s a trend that could impoverish incautious investors, so we’re sending a warning signal and giving GameStop stock a “D” grade today.
You’ve probably heard about the recent short squeeze after a popular Reddit user and meme-stock trader resurfaced on social media after a yearslong break. GameStop stock was pumped and dumped. We don’t want anyone to be the loser in this risky game of musical chairs, so let’s keep it real and do some fact-finding with GameStop now.
Don’t Celebrate GameStop’s Capital Raise
It’s funny how short-term stock traders can condemn GameStop’s capital raise one day, but then celebrate it another day. It just goes to show that meme-stock traders can be fickle and unpredictable sometimes.
On May 17, GameStop stock fell 26% after the company announced its plan to raise capital by selling 45 million shares. Naturally, GameStop’s investors were concerned about the prospect of share-value dilution.
“From a corporate perspective, it makes a ton of sense, but it throws some cold water on the recent rally, because now you’re diluting the existing shareholders,” explained Paul Nolte, senior wealth adviser at Murphy & Sylvest.
Fast-forward to May 24, and GameStop issued a news release stating that the company had completed this share sale (formally called an “at-the-market equity offering”). Again, the company sold 45 million shares; this wasn’t new news to anyone.
The new piece of information was that GameStop had raised “approximately $933.4 million” through this share sale. GameStop stock rallied sharply in after-hours trading, but should anyone really celebrate this news?
Investors surely knew ahead of time that it would be a large sum of capital, since 45 million is a lot. None of this reduces the likelihood that GameStop will resort to more large-scale share sales in the future. So, the dilution concerns haven’t gone away and could reemerge at some point.
GameStop’s Financials Are Still Faulty
Furthermore, investors can’t simply ignore GameStop’s fundamentals. The market’s weighing machine will come into play eventually. Then, GameStop stock could rob shareholders of their wealth. This happened in 2022, 2023 and early 2024, after the original meme-stock rally.
Greed isn’t an excuse to overlook the unfortunate ending to the meme-stock rally of 2020 and 2021. It didn’t end well, and we encourage you to look into GameStop’s financials carefully before considering an investment.
The overall picture doesn’t look great when we examine GameStop’s preliminary results for the first fiscal quarter, which ended on May 4, 2024. The company expects net sales of $872 million to $892 million, which would represent a steep drop from $1.237 billion in the year-earlier quarter.
In addition, GameStop expects a quarterly net earnings loss of $27 million to $37 million. For what it’s worth, this would be an improvement over the net loss of $50.5 million in the year-earlier quarter. This is a reason to give GameStop stock a “D” grade instead of an outright “F” today. That grade might change later on, though.
It’s problematic that GameStop remains unprofitable. Along with this, consider that GameStop expects to have ended the quarter with cash, cash equivalents and marketable securities of $1.073 billion to $1.093 billion.
That’s below the $1.31 billion that GameStop had at the end of the year-earlier quarter. Thus, investors can plainly see why GameStop’s management may have felt the need to raise capital by any means necessary.
GameStop Stock: Beware the Flash-in-the-Pan Rally
It’s exciting, no doubt, to take part in a high-volume meme-stock rally. However, like a game of musical chairs, the rally can end at any moment. If you don’t have very lucky or skillful timing, you could lose a lot of money quickly.
We prefer to investigate companies carefully, rather than get involved in flash-in-the-pan trends. GameStop’s capital raise isn’t really something to celebrate, and the company’s financials aren’t ideal. So, buying GameStop stock based on a meme-stock trend is quite risky, and we’re not recommending investing in it today.
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.
