The madness in GameStop (NYSE:GME) stock earlier this year was one for the history books. It was fun while it lasted, but the mania that drove this stock to record highs has all but played out. So, why hasn’t this bricks-and-mortar chain turned aspiring e-commerce play fully collapsed yet?
Namely, it still has a devoted fan base with Reddit speculators, many of whom continue to hold it with “diamond hands” (in r/WallStreetBets parlance). Even as its valuation remains fully out of sync with its fundamentals, so far they’ve refused to sell.
Why? Believing in not just the “short squeeze” play with GameStop (which is over and done-with, by the way), but the turnaround angle as well, they still see it as a stock worthy to own at any price.
As they continue to hold it, the stock could hold steady at its current triple-digit prices (around $175 per share). Yet, at some point, these “diamond hands” will get “paper hands.” That is, Reddit speculators will become impatient, and cash out while the going’s still good.
In turn, this will create another round of heavy downward pressure on shares. It may not push them back to pre-madness levels (under $20 per share). But, even a pullback to $50-$75 per share would be bad news for those who bought it at or near today’s prices.
So, what’s the best move? It’s hard to say when exactly the bottom will fall out. But, it’s eventually going to happen. Getting ahead of trouble, sell it if you own it. And avoid with a capital A if you don’t.
A Successful Turnaround Won’t Put More Points Into GME Stock
With Ryan Cohen now running the show, I can see why some are bullish he can pull off a turnaround. Under his helm, the company is shaking up its C-suite. It’s set to have an executive team chock full of e-commerce and tech industry veterans.
GameStop is also smartly taking advantage of its inflated stock price, with its recent $551 million secondary equity offering. Yes, it’s dilutive for current shareholders. But, considering the company today sports a $12.3 billion market capitalization, dilution is minimal. It’s a low-cost way to bulk up its war chest.
With a change in vision, and plenty of cash to possibly turn this vision into a reality, the company may morph into a major e-commerce company. The issue, though, is that GME stock continues to trade as if it’s already a large online retailer.
Sure, “it could grow into its valuation.” But, with the pivot still in its early stages, it’s premature to say that it’s certain. Building itself into a leading e-commerce company will take time. And, with so many established names already dominating the space, GameStop has its work cut out for it. At best, this evolution will help keep the stock steady. However, it will do little to move the needle further for shares.
In fact, with disappointment in this transition the more likely outcome, a massive selloff may be just around the corner.
The Bottom Will Inevitably Fall Out
For now, the idea of an e-commerce shift is enough to keep the stock’s devoted fans happy. But, at some point, it’s going to have to deliver. And, with this strategy change likely a multi-year endeavor, it’s going to take more than a few quarters for it to make progress.
What does this signal? It may be tough to determine when exactly the bottom will fall out. Yet it’s definitely on the horizon. As mentioned earlier, as the months progress, diamond hands will increasingly become paper hands. But, with the “meme stocks” trend largely over, there are few new buyers willing to dive into this.
As possible sellers outnumber possible buyers, we’re going to see substantial downward pressure on GME stock. To what extent? The e-commerce catalyst, along with the war chest of cash, may mean shares have little chance of fully falling back below $20 per share (what they traded for back in early January).
A selloff may find a floor at much higher prices — say $50-$100 per share. A $3.5 billion to $7 billion valuation seems fair for a company that is looking to build on its approximately $1.5 billion in online sales last fiscal year. In other words, you might expect a possible decline as little as 42.9%, but as high as 71.4%.
Bottom Line: Continue to Steer Clear of GameStop
Its turnaround may pay off, and the company could thrive in the coming years. But, with its stock completely divorced from its fundamentals, this success will likely do little to boost the price of GameStop shares.
Worse yet, with little to support for today’s share price, a wipeout may be just around the corner. My view on GME stock remains the same: continue to avoid it.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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