It’s Holding Up Now, But Gamestop Stock Could Still Tumble
Many may be waiting for the other shoe to drop with Gamestop (NYSE:GME) stock. But not even market-wide jitters about the Delta variant could knock down the most popular “meme stock.” In fact, on the day the Dow slumped over concerns, GME stock ticked higher rather than lower.
Will this continue, even if the market at large — and “meme stocks” in particular — are moving the wrong direction? Not so fast. The selloff in this Reddit favorite hasn’t so far been as dramatic as the declines seen with other names like AMC (NYSE:AMC) and Contextlogic (NASDAQ:WISH).
Nevertheless, don’t take that to mean it’s a safe harbor by any stretch of the imagination. The decline of Gamestop may take time, but it’s going to happen. Short interest continues to fall, reducing its appeal as a short-squeeze play. Of course, its e-commerce metamorphosis may remain in motion, but today’s valuation more than reflects that.
So, if you got in this early and are sitting on large paper profits, what’s the best move? It’s high time to turn those “diamond hands” into “paper hands.” And if you hold no position in GME stock? Don’t enter one, as there’s more pointing to further declines than any sort of continued upward move.
Despite Its Strengths, GME Stock Will Still Fall
This may sound like hyperbole, but compared to other Reddit plays, GME stock may be a “blue chip” by comparison. Why? Well, unlike the other popular names that speculators have chosen to ignore the red flags for, this one has admittedly fewer warning signs.
In fact, with Ryan Cohen now spearheading a move from bricks-and-mortar to digital first, Gamestop has a shot of avoiding the fate that befell names like Blockbuster. Contrast that with AMC, which is completely dependent on movie theater attendance “getting back to normal” despite the “new normal” of film releases at home.
Additionally, this company is more than well-capitalized. As InvestorPlace’s Mark Hake recently wrote, the most recent secondary offering of GME stock has swelled up its war chest to nearly $1.9 billion. So, with so much in its corner, why is GME set to decline further from here?
It may have a lot more going for it than other favorites. But as the “short squeeze factor” becomes less important to the bull case, things like valuation are going to come off the back burner. And, with shares still overestimating the upside of its move from bricks to clicks, an eventual slide lower is inevitable.
From Short Squeeze to Digitalization
Don’t get me wrong — as of this writing, the short-squeeze angle remains in motion with GME stock. Short sellers continue to lose money betting on the stock falling to a valuation that’s more in line with its fundamentals and prospects. Yet, short interest is trending lower. On May 28, 11.97 million shares were sold short. And by Jun. 30?
This had fallen to 8.2 million shares. This decrease in short interest may be gradual. But the fact it’s not rising is bad news for traders still holding this in hopes that it will get squeezed back to the all-time high of $483 per share.
So, as this short-interest angle fades, the bull case shifts to the digitalization catalyst. That is, Gamestop’s transition from a brick-and-mortar business to a full-fledged online retailer. With its brand name and existing infrastructure — not to mention its $1.9 billion in cash — the company may have what it takes to pull off this pivot. Just don’t expect it to work in the favor of GME stock.
Once the short-squeeze factor fully fades, Reddit investors aren’t going to stick around. That means that investors who use metrics like price-to-sales (P/S) or price-to-earnings (P/E) will be back in the driver’s seat. And that points to GME falling towards its maximum potential underlying value of between $50 and $100 per share.
Now’s the Time to Sell GME Stock
Gamestop shares may have greater resiliency than other Reddit stocks. The stock may also have attributes that make it a relative “blue chip” compared to AMC, Clover Health (NASDAQ:CLOV) and other popular names on r/WallStreetBets.
However, don’t mistake these positives as a sign that GME stock isn’t headed for an eventual collapse. As its short interest goes down, so will its appeal to many traders. And, as they exit their positions, fundamentals-focused investors will regain control, resulting in a big revaluation.
A 50%-plus move lower for GME stock may not be instantaneous. It is bound to eventually happen, though. So, with little hope for another pop from today’s prices, your best move is to sell.
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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.
