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GameStop – Meme Stock or Juggernaut?

GameStop Inc. (GME) is a leading American gaming merchandise retailer. The company’s focus on video games and consumer electronics provided an intriguing value thesis for investors looking for pandemic rebound plays last year. Given the fact this company was trading around $4 per share in mid-2020, many high-profile investors, such as Michael Burry, jumped aboard the value train.

However, this stock has gone absolutely parabolic during a meme stock rally earlier this year. Currently, shares of GME stock trade above $200 per share, giving investors who have held since mid-2020 a 50-bagger. That’s impressive.

However, questions about whether this stock’s valuation is justified at these levels persist. Is this a company that’s really worth a $15 billion valuation? Or has the market simply lost track of the fundamentals of companies right now?

I remain bearish on GameStop, despite the short squeeze potential of this stock to head higher.

(See GameStop stock charts on TipRanks)

Can the Rally in GME Stock Continue?

Indeed, through the end of 2020 to today, not much has changed in GameStop’s underlying business model. Sure, video game sales have taken off as the pandemic has allowed for more time in front of the TV for those seeking entertainment. Perhaps that trend will continue for some time.

However, the thesis that a beaten-down bricks and mortar retailer like GameStop can survive the onslaught of e-commerce transactions and in-game/in-console purchases from gaming giants remains key to the GameStop story. It wasn’t that long ago that investors were wondering if this company would go bankrupt or not.

Fast forward to today, and GameStop has been able to leverage its existing stock price to not only push the survival discussion aside, but to bring many investors on board with the idea that this company can thrive. A company’s stock price is supposed to reflect the market’s view of its long-term prospects. In this case, it appears not everyone believes this to be the case.

GameStop’s dramatic rise has attracted significant legal attention, with the House Financial Services Committee and the Justice Department investigating the surge. Additionally, reputed brokerages made policies to restrict trading in GME and the likes. Further, the SEC informed lawmakers on Tuesday that its report on the GameStop meme saga is ready, and will be out shortly.

Whether this report will say anything earth-shattering remains to be seen. However, according to most level-headed investors, this rally in GME stock is unsustainable and will likely come to an end at some point.

Not Much From the Horse’s Mouth

Investors were looking for key insights on GameStop’s business strategies and growth plans during the company’s recent earnings call. However, the new CEO, Matt Furlong, appears to not be looking to show all his cards just yet. The conference call was only six-and-a-half minutes long, and revealed little beyond what was already available in GameStop’s earnings press release.

However, he did shed light on two aspects of the company’s business plan that look to be priorities. A unified leadership team at GameStop will focus on positioning the brand to scale. Simultaneously, the company will also look to maintain competitive pricing alongside growing its product offering and improving its supply chain.

Apart from this, Furlong states that GameStop management will leave no stone unturned to return value to its shareholders. Nonetheless, the boss did not take any further questions from analysts. This has kept investors guessing, but has done little to move GME stock over the past week.

GameStop Earnings Strong, But Don’t Justify Valuation

Trading at around $200 per share at the time of writing, GME stock is simply overvalued.

Yes, the company did beat Wall Street expectations for revenue. The company’s revenue grew by 25% year-over-year to $1.2 billion for the second quarter. That’s a win for investors bullish on this stock.

Additionally, the company’s net loss narrowed to $0.85 per share from $1.71 per share a year earlier. This reflects some of the positive improvements GameStop’s management team has made of late to boost margins and reduce losses.

However, GME stock did decline somewhat following its earnings report. Investors seemed to want to learn more about the transformation underway at the company. With little detail to go on, investors appear to remain speculatively bullish with GME stock.

It’s a speculator’s market right now. Indeed, GME could perhaps be the most speculative stock of all time, given this valuation. Accordingly, long-term investors should be wary of putting one’s money to work in a company that continues to post heavy losses with strong secular headwinds to battle in the years to come.

What are Analysts Saying about GME stock?

According to TipRanks’ analyst rating consensus, GameStop is a Moderate Sell. Out of 4 analyst ratings, there are 1 Hold recommendation and 3 Sell recommendations.

The average GameStop stock price target is $120. Analyst price targets range from a high of $190 per share to a low of $50 per share.

Bottom Line

GameStop could be the most overvalued stock in the universe right now. Long-term investors putting any money to work in this stock are taking a big risk at these levels. This is a stock that has already squeezed, and will come back to earth one day.

Accordingly, investors may be much better off staying on the sidelines with this stock for the time being.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

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