Why GameStop Stock Is Not Unsinkable

Stock Market

Inflation, interest rates and recession risk have knocked stocks lower again. Alongside stocks, the crypto and non-fungible token (NFT) markets have cratered, too. Yet this latest market meltdown has only had a moderate impact on GameStop (NYSE:GME) stock. What gives?

The long side has seemingly regained the upper hand. They bid up the stock post-earnings, despite mixed results. This has squeezed the crowded short-side. As a result, the meme stock king, while knocked lower a bit by the June 13 and June 16 broad market sell-offs, has held onto most of its May relief rally gains.

Ticker Company Price
GME GameStop $134.34

With this, you may think shares in the video game retailer are unsinkable. Although not anywhere near their meme stock highs, it could appear that it’s at little risk of falling to a price more in line with its underlying value. However, you may not want to jump to that conclusion.

GME Stock and its Oddly Resilient Recent Performance

Briefly falling down to double-digit prices during the May market selloff, since then GameStop has climbed back to prices north of $100 per share. It made its trek back to triple digits in late May, during that month’s relief rally.

Then, after its June 1 quarterly earnings release, GME stock rallied again. Again, this came despite what were arguably mixed results. Revenue for its fiscal first quarter (ending April 30), were up modestly (up 7.9% year-over-year), but its net loss more than doubled compared to the prior year’s quarter.

The company also loaded up heavily on inventory during the quarter. This could be a risky move at this stage of the economic cycle. If the economy continues to slow down, or perhaps officially enters recession territory, decreased customer demand could leave the video game retailer in the same boat as general retailers like Target (NYSE:TGT).

Still, this didn’t stop the longs, whether they be retail meme traders, or perhaps more sophisticated market participants, from pouncing on it post-earnings. While the aforementioned big down days for stocks softened the blow for the shorts, GameStop shares are still up from where they were before the earnings report.

Why This Resiliency May Not Last

Based on its recent price performance, GME stock may seem immune from what bears (such as myself) believe is a much-needed de-rating. That is, as long as the long side continues to counter the short-side, the fact it trades for well-above its underlying value is irrelevant.

Still, it may be premature to assume that this unconventional bull case for the stock is re-emerging. The days of it trading divorced from fundamentals may remain numbered. How so? Excitement from the long side could cool down, in two ways.

First, some traders who dived into GME stock again as a squeeze play could decide to take profit. The fact that the recently overzealous short-side has backed off, as seen from the drop in short borrow rates after their early June spike, could also affect its squeeze appeal.

Second, traders could have also piled into the stock ahead of its planned stock split. Shareholders approved the split at the June 2 shareholder meeting. Enthusiasm for this catalyst may peak, assuming management officially announces a split date. This latest round of “meme stock madness” for GameStop could fade. In turn, resulting in shares resuming their slide lower, as fundamentals come back into focus.

Bottom Line: Be Careful Chasing GameStop

Admittedly, ahead of earnings, I made the wrong call on GameStop. Instead of a lackluster earnings report pushing it lower, shares are up in spite of poor operating performance. Yet while this may underscore the risk of shorting this stock, going long is a risky move too.

Excitement about it could again turn on a dime. Perhaps pretty soon, if its squeeze and split appeal fades. Not only that, it’s still hard to see the upside. That is, beyond the questionable chances of the “mother of all short-squeezes,” playing out.

Its transition into primarily an e-commerce company appears fully priced-in. By the time its NFT marketplace and wallet service launch, NFTs could have by then gone the way of the pet rock.

With many stocks now on sale, focusing on long-term opportunities appears more ideal than rolling the dice on GME stock. Be careful if you choose to do so.

On the date of publication, Thomas Niel did not have (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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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