GameStop (NYSE:GME) stock has swung wildly since Roaring Kitty returned to social media to reiterate just how much he likes the video game retailer. And though shares are down sharply from those peaks, what may not be clear to many is that GameStop stock continues to trend higher.
Just because it is not acting like a moonshot doesn’t mean the stock isn’t still rising. GameStop is down 61% from its May high point but up 161% from their April lows. More importantly, after the initial frenzy died down, GameStop stock is still growing. Shares are up 37% since the end of May.
Yet is the stock worth it? Should investors who remained on the sidelines buy in now? Let’s take a closer look at GameStop stock to see if maybe it should be put on your buy list now.
More Sizzle Than Steak
Roaring Kitty, who’s real name is Keith Gill, ignited of firestorm of trading in GameStop shares by first cryptically posting he was still interested in the video game retailer and then showing he had amassed a large, valuable position in the stock.
It got a lot more valuable after traders piled back into the stock, so much so that Gill came under regulatory scrutiny for trying to manipulate the market. Online brokerages were also considering removing him from their platforms. While the probes are ongoing, you can say that Gill isn’t willing to put his money where his mouth is.
But now that the hoopla has died down, GameStop stock continues to rise. Gill has said he is confident in the ability of chairman and CEO Ryan Cohen to turn the company around.
While investors were disappointed, Cohen didn’t share more of his vision for the company during the retailer’s annual shareholder meeting, they’ve shrugged off the opacity and continue to buy up the stock.
Losing Money, Raising Cash
That is the crux of the investment thesis right now. Can Cohen turn the business around? Also, exactly how will he achieve this?
GameStop’s business is still deteriorating. Fourth-quarter sales fell 28% to $882 million, which was the midpoint guidance it gave last month. Net losses of $32.5 million also hit the exact midpoint of the video game retailer’s forecast.
Yet Cohen was opportunistic. He used the renewed interest in the company to sell more stock. GameStop raised some $933 million from the stock sale, and now has nearly $2 billion in cash available to it. That ensures the retailer isn’t going bankrupt any time soon, but it also dilutes shareholders.
GameStop charter authorizes it to issue as many as 1 billion shares of common stock and up to 5 million shares of preferred stock. The retailer has more than 306 million shares outstanding, meaning even more dramatic dilution could be coming.
And yet investors are no closer to understanding how the business will be transformed.
What Is the Plan?
As I discussed recently, Cohen has tried numerous tricks to spark sales growth. Whether it is turning the retailer into an e-commerce destination, selling connected TVs and Razor scooters or launching a non-fungible token marketplace, these have all been far afield of its core business and none have worked.
So what is left for GameStop to do? As video games have been digitized and moved online, and companies are releasing them directly onto their own sites and consoles, the need for the retailer diminishes.
While there may always be a market for physical games, it is just going to be a very small niche. It means it is hard to justify a GameStop stock valued at $11 billion. Owning a small player in a small pond is fine but this is not a long-term investment. It is a trading stock.
That opens up a lot more risk in trying to time entry and exit points. It is best to just stay on the sidelines to see where exactly Cohen is trying to take GameStop stock and the company.
On the date of publication, Rich Duprey 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
