After weeks of surging through the hype, GameStop’s (NYSE:GME) fanfare appears to finally be subsiding. Now, retail investors are more aware of this stock’s risks in times of short squeezes and meme frenzy. Indeed, holding GME stock poses heightened risk of total loss amid a dip in market sentiment. Management could retreat from investment positions due to market panic. Also, there’s always the potential for future stock issuance, if the price does go up.
It’s my view that GME stock is a meme stock best avoided right now. There’s really no way to win (and I say that on both sides of the trade – I think this is a dangerous stock to short as well).
Here’s why I wouldn’t touch this stock with a 50-foot pole.
$2B Capital Raise Thanks to Roaring Kitty
GameStop raised over $2 billion in its second share sale within a month, following a surge influenced by Keith Gill, also known as Roaring Kitty. This occurred shortly after Gill’s first YouTube livestream in three years.
The stock saw a 23% increase on Tuesday and doubled over the past six months. This is due to its popularity in retail investors during the pandemic. At the same time, these meme stocks were also rising. Also, they often saw significant price swings due to heavy bets against them by hedge funds.
The company announced on June 11 to the New York Stock Exchange that it successfully sold all 75 million shares offered, raising $2.137 billion. This adds to the $3 billion raised over the past month from share sales as its market value soared, including $933.4 million from selling 45 million shares previously.
Earlier this month, GameStop’s shares surged following a Reddit post linked to Keith Gill, indicating he held 5 million shares valued at over $100 million, sparking a rally among online investors in 2021.
Keith Gill Boosts GME Holdings
Due to the Roaring Kitty putting influence on meme stocks like GME, he also boosted his investment to nine million shares. As a result, Gill became the fourth largest shareholder. He exercised call options at $20 each, increasing his portfolio to $268 million.
GameStop closed at $28.70, down 1.44% on Friday, affecting Gill’s portfolio by $9 million per dollar change. This shift alters GameStop’s shareholder landscape, paralleling Chief Executive Officer (CEO) Ryan Cohen’s 2020 holdings.
GME Stock Looks Like a Trap
Despite GameStop’s deep expertise covering 55 retail companies, the company chose not to apply any sophisticated analysis this past quarter. Its Q1 sales declined 29% year-over-year (YOY) and lost over $32.3 million. However, it was a small improvement from last year’s loss, which reached $50.5 million. To me, it’s completely evident that the company’s business trends continue to deteriorate and will likely continue to do so moving forward.
The company resisted reducing its 4,169 global stores, unlike competitors like Walmart (NYSE:WMT), which chose to invest in AI and same-day delivery, rendering store visits obsolete. If GameStop’s management team doesn’t change something, and fast, it could be game over sooner than later for this company.
On the date of publication, Chris MacDonald did not hold (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.
