Stocks to sell

A Correction in GameStop Stock Appears to Be Inevitable

As was the case last month, GameStop (NYSE:GME) stock has managed to perform relatively well. That is, considering how the conditions that enabled the “to the moon” rally earlier this year are no longer in play.

GME stock

Source: TY Lim / Shutterstock.com

Yes, shares in this video game retailer remain one of the most talked about on Reddit’s r/WallStreetBets subreddit. The “diamond hands” crowd still hasn’t given up on the king of meme stocks. Should you also buy it as GameStop continues to fly in the face of conventional stock market wisdom?

Not so fast.

The proverbial shoe may not have dropped already. But what could cause its ultimate drop in price remains in motion. Risks like slowing economic growth, high inflation and monetary policy changes point to more trouble ahead for stocks overall. What does this have to do with GameStop? These issues will likely lead to further changes in stock market conditions.

These changes may result in an actual correction or crash in stock prices. Those still holding GME stock will finally be running scared. Once that happens, a move to a price in line with its underlying value will occur.

The story hasn’t changed much here. Yet it’s still one you don’t stick around for the conclusion.

GME Stock and the Deflating Meme Bubble

In 2021, the meme stock phenomenon has played out in many waves. First, of course, was the wave that initiated this phenomenon, back in late January/early February. Then, after a lull in the spring, meme madness made a comeback, in late May/early June. Finally, in late August, up until around Labor Day, there was an attempted wave that in hindsight was more of a meme stock “dead cat bounce” than anything else.

Other meme names, like AMC Entertainment (NYSE:AMC) and Clover Health (NASDAQ:CLOV) made their most epic move during this second wave. GME stock, however, didn’t see a secondary boost above that of its incredible run from $20 to as much as $483 per share. All it did during the second and dead cat waves was make a brief return to $300 per share and $200 per share, respectively.

On the flip side, GameStop has fared a lot better than, with the exception of AMC, the secondary meme stock names. Clover today now trades around where it was when it took off in June. Names like ContextLogic (NASDAQ:WISH) have fared even worse. This continued resiliency, even as the meme bubble deflates, may give you the idea that GME stock can sustain, or perhaps add to, its current value.

Unfortunately, this isn’t the case. Possible catalysts that may have helped it stay strong, like possible inclusion in the S&P 500 index, have come and gone. Another possibility, that GameStop grows into its valuation thanks to its transformation from brick-and-mortar retailer to e-commerce pure play, remains debatable as well. GME stock may end up well ahead of where it started just before meme stocks became a thing.

But where shares eventually end up could still be substantially below today’s prices.

How Low Could GameStop Go in the Next 12 Months?

I’m  still sticking to my bear thesis on GME stock. So-called diamond hand holders of this stock are finally going to cash out. The good news for those who got in early is that this is a “take profit” sort of exit.

But for those a little late to the game, it will be a hard drop for GameStop from today’s prices. Investors will have accepting losses and move on. In other words, once the Reddit trader army cashes out, the pool of potential buyers will be made up mainly of investors only willing to buy at a fair valuation.

What’s a fair valuation? Given its e-commerce potential, it’ll likely settle at a level above its pre-meme prices, yet well below today’s prices. Based on prior numbers run by InvestorPlace, a fair value for the company is between $50 and $100 per share.

That’s a big fall from its current price of about $181.

The Bottom Line

There’s not much that hasn’t already been said about GameStop. It’s richly priced, at a valuation that’s well above even its potential value following its pivot to online retail. Its dedicated base of meme investors has not given up on it. Yet at some point, even they’ll decide to cash out. Once that occurs, a dramatic move lower is more than likely.

As it’s clear how this game will end, don’t tempt fate by buying GME stock at today’s prices.

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

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