GME stock is the poster child of the lucrative “short squeeze” rally that took off in early 2021. But now reality is setting in — and it’s time for GameStop (GME) investors to look at data instead of just memes.
Shares of GME stock surged 1,600% in January. Individual investors coordinated a buying spree in the video game retailer’s shares using online message boards. The buying surge caught the “shorts” who were betting the stock would fall off guard. These shorts faced unlimited losses unless they bought the stock, further fueling gains.
It was an inventive way to push GME stock higher.
But the massive short interest that primed GME stock for a rally is fading fast. That means it’s now up to earnings, new products and services, industry group leadership, institutional buying and the market’s direction to tell you if this is a stock to buy now. Analysts think it has 88% to fall.
Why Did GME Stock Go Up?
GME stock ironically went up because it fell so much. And most people thought it would fall more.
Coming into 2021, GME shares had lost a third of their value over the previous five years. Investors betting the stock would fall, the shorts, controlled GME stock shares in late 2019. That overly bearish bet set up a perfect environment for a massive short-squeeze rally.
A coordinated effort to buy the stock using Reddit, despite its ugly fundamentals, pushed GME stock up fast. That forced short-sellers, betting against it, to buy the stock. This set off a powerful short squeeze rally. Additionally, Chewy (CHWY) founder Ryan Cohen bought the stock and joined its board. The former CEO is leaving. And the stock is also in the S&P SmallCap 600. So the rise forced institutions tracking the index to buy the stock.
The company is trying to restructure itself to reposition for a digital era. Traders bet the company can remake itself. That might be some kind of digital video-game purchasing system, like Apple‘s (AAPL) App Store or Valve’s Steam. Additionally, some hope the company will pivot into popular online gaming streaming. Amazon.com (AMZN) is finding success there with its Twitch online service.
The company also plans to sell more shares and use the proceeds to cut its $216 million in long-term debt.
Can You Trade GME Stock?
Yes, you can trade GME stock, but be careful. The stock is now available for trading at all major brokerages.
There are caveats, though. Given the intense volatility in GME stock, some brokerages like Robinhood limited some transactions in GME stock earlier this year. At one point, investors could only sell shares of GME stock they owned and couldn’t buy more.
Also, since GME stock is highly volatile, some stop-loss selling and buying may not work as you’d expect. The stock can be halted on extreme volatility. Also, if you set a limit order, it might not execute at your price if the stock moves too fast.
Why Is GME Stock Falling Now?
GME stock is falling as it’s facing an uphill battle. GameStop is seen losing money in 2021, a big blow to the fundamental story of GME stock.
Meanwhile, many of the forces that propelled GME stock are working against it now. Shorting activity is down sharply — as short sellers see the risk of their moves and pull back. Shorts only control 15% of GME stock now, says S&P Global Market Intelligence, down from roughly 90% in early 2021.
Additionally, much of the “good news” on the stock, like Cohen’s involvement is priced in. Cohen is now the third largest holder of GME stock, with 9 million shares or roughly 13% of the company. And many analysts continue to tell investors to “sell” as they see the company unable to compete in a new world of digital game distribution.
Wall Street analysts who follow the stock closely warn it’s worth much less than retail investors think it is. The average 12-month price target is just 17.92. If they’re right, that’s 88% potential downside from its current price of 148. The seven analysts following the stock rate it “underperform” on average.
GME Stock Recent Quarterly Report
GME stock’s most recent quarterly report didn’t inspire much confidence, either. On March 23, the company reported 5.5% higher fourth-quarter profit of $1.34 a share. That missed forecasts by nearly 6%. Meanwhile, revenue sank 3% during the quarter to $2.1 billion. The top line fell short of estimates by 5%.
And it’s not just a case of a tough quarter. The company’s EPS growth rate started declining consistently in 2017 and turned into outright losses for fiscal 2021, which ended in January. Meanwhile, GME stock’s sales posted an 18% annualized drop in the past three years.
Interestingly, GME stock’s consumer electronics retail group is doing well. It’s ranked 6th out of 197 groups, says IBD’s Stock Checkup. But GME stock’s quarter was a disappointment.
GME Company History
GameStop used to hold an important position in the video gaming industry. It was the spot to buy the latest video game consoles and games.
The company, based in Grapevine, Texas, turned stores, usually in malls, into hubs for gamers. You could always get your hands on just-released games. But more importantly, you could save money by trading games you were bored with for new or used ones. By being a used game bazaar, GameStop remained relevant even with competition from Amazon, Walmart (WMT) and Target (TGT).
Back in 2016, GameStop ran 7,117 stores. And in the 12 months ended in January 2016, sales at stores open at least a year rose 4.3%. But now many people just download games to their phones or computers. Now GameStop runs just 4,800 stores. And sales at stores open at least a year are down nearly 10%.
Fundamentals For GME Stock
GME stock’s fundamentals are a story of steady decline.
Analysts think the company will lose 98 cents a share in fiscal 2022. That’s not as bad as last year’s loss of $2.14 per share. And revenue should rise 6% to $5.1 billion vs. last year’s 21% skid.
But analysts think the company will lose another $48.7 million, or 69 cents a share, in the April quarter. Revenue, though, is seen rising 12% to $1.1 billion. GameStop’s top line is benefiting from sales of high-demand next generation Xbox and PlayStation consoles this year. These products, though, are sold at low profit margins.
Such weak fundamentals explain why GME stock’s EPS Rating is just 28 out of 99. That means its fundamentals are weaker than 72% of all other stocks. Typically, leading stocks start sustainable runs when their EPS Ratings are at or above 80.
GME’s fundamentals are so weak, they dilute its IBD Composite Rating, a measure looking at stock and fundamental performance. GME stock’s Composite Rating is just 60. That means it’s lagging 40% of all other companies. Leading stocks usually have Composite Ratings of 90 or higher.
Technical Analysis Of GME Stock
GME stock’s amazing run in January was epic. And it explains why GME stock carries a perfect 99 IBD Relative Strength Rating. The RS Rating compares the stock’s price gains to all other stocks’. Typically, top stocks carry RS Ratings of 80 or higher.
But the problem is GME stock is fading, not showing strength. The stock is still up more than 700% this year. It hit a wall, though, in mid-March. GME stock lost more a third of its value since March 15. And an analysis on MarketSmith shows a rapidly declining RS line. That’s a clear sign of how it’s losing its technical leadership position. The stock is 70% below its 52-week high.
Plus, GME stock blasted so much from its 19-week consolidation last September, it’s far extended from any buy point. The buy point in last year’s consolidation was 6.57. It’s now more than 2,000% away from that in the past 33 weeks.
Savvy traders know it’s much wiser for a stock to consolidate for weeks and then break out. That’s your sign this could be a sustainable winner. GME stock doesn’t qualify.
Is GME Stock A Buy?
GME stock is exciting for sure. And it has been a short-term speculative winner in early 2021. Many investors who were in GME stock early clearly won big.
But that’s ancient history now. What matters now is looking ahead to what’s next. And there the picture is less clear. Fundamentals are challenging at best. And the chart is weakening and lacks a clear buy point.
It’s fine to watch this as a sign of speculation in the market. But when looking at winning stocks, you can do better.
GME Stock Loses “Short” Boost
The most shorted S&P 1500 stocks on March 15 are most severely underperforming since then
|Company||Symbol||Short Interest As % Outstanding Shares March 15||Stock YTD % Ch.||% Ch. Stock Since March 15*||Sector||Composite Rating|
|Tanger Factory Outlet||(SKT)||31.1%||68.7%||-4.9%||Real Estate||47|
|United Natural Foods||(UNFI)||22.2||122.7%||-3.3%||Consumer Staples||93|
|Bed Bath & Beyond||(BBBY)||21.9||51.1%||-17.7%||Consumer Discretionary||66|
|Tabula Rasa HealthCare||(TRHC)||21.1||0.8%||-0.5%||Health Care||10|
|B&G Foods||(BGS)||20.5||8.0%||-6.2%||Consumer Staples||41|
|GEO Group||(GEO)||20.2||-32.4%||-27.3%||Real Estate||18|
Sources: IBD, S&P Global Market Intelligence, * — through April 23, 2021
Follow Matt Krantz on Twitter @mattkrantz
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