GameStop Stock is on The Road to a More Rational Price

It goes without saying the past two months have been brutal for GameStop (NYSE:GME) investors. Back in November, GME stock was trading for as much as $252.20 per share. Today, at around $123.25 per share, it’s down more than 50%.

This sell off, of course, is the product of changes in the market environment. Since December, the U.S. Federal Reserve has made it known that it’s going to raise interest rates in 2022, in order to combat inflation. With rates going up, richly-priced stocks of all stripes have been under pressure.

That includes the top meme stocks. Although it had a bit of a “dead cat bounce” in December, thanks to strong box office results for Spider-Man: No Way Home, AMC Entertainment (NYSE:AMC) has tumbled as well. During this same time frame, it’s gone from the low-$40s to the low-$20s per share.

Granted, not all of GME’s legion of retail traders, active on Reddit’s r/WallStreetBets, have traded in their diamond hands for paper ones. Many are still holding on, under the belief that its e-commerce transformation, and move into non-fungible tokens (NFTs) will enable it to sustain its valuation, and make a stock price comeback. However, I wouldn’t bank on it playing out this way.

GME Stock and its Fed-Induced Tanking

The fact GameStop managed to keep its meme-driven gains for so long is quite remarkable. With the exception of AMC, most other stocks that became popular with retail investors during 2021 failed to achieve this feat. Even as rock-bottom interest rates continued to encourage investment in riskier assets, secondary plays like BlackBerry (NYSE:BB) gave back their meme gains not too long after the initial “wave” last winter.

But while GME stock and AMC stock were far more resilient, clearly they were not unsinkable. With the prospect of higher interest rates, and the market’s subsequent move to “risk-off,” the Reddit crowd’s solidarity has started to break. More fair weather fans have made their exit.

Meme stocks less scared by volatility may be holding on for now. Possibly, due to the belief the Fed’s rate hike plans are now baked-in. Or, perhaps due to the belief that the company’s turnaround plans will outweigh recent negatives.

That said, there’s no guarantee that the Fed-induced selloff is fully over. Along with this, as the meme community’s control of the stock continues to wane, fundamentals will continue to play a larger role in its price movement.

Next Stop: Double-Digit Prices

For now, enough GME stock aficionados continue to believe the “story” crafted about this meme stock. As Chairman Ryan Cohen makes progress with his digital metamorphosis of the video game retailer, which now includes moving into the NFT space, shares will experience yet another “to the moon” moment.

But like I hinted at above, I wouldn’t count on GameStop’s next big move being toward past price levels. Instead, expect it to make a trip back below $100 per share. First, more negative reaction to the Fed’s rate hike moves. As analysts at Goldman Sachs have argued, interest rate increases could wind up being more aggressive than currently expected.

Market volatility from this could scare off more of GME’s meme stock army, resulting in shares taking another dive. Admittedly, rising interest rates may not result in the stock falling completely back toward its pre-meme prices. Yet as more Reddit traders cash out, and this becomes less of a crowded meme trade? Fundamentals will get back into the driver’s seat.

Put simply, “game over” for GameStop. As there’s still high uncertainty over whether its long-term strategy will pay off, it’s growing harder and harder to price it as if it’s already completed its pivot from bricks-and-mortar to digital first. From there, the stock could continue to drift lower. Perhaps down to the analyst community’s median price target ($45 per share, according to the Wall Street Journal). Or worse, down to the low end of sell-side price targets ($23 per share).

Bottom Line on GameStop

As meme stock resiliency wears off, more downside lies ahead for GameStop shares. Forthcoming interest rate increases from the Fed have already knocked it down another 50%. Another big move lower could happen, if the Fed’s rate hikes come in higher than expected.

Continued issues executing its turnaround plan will weigh on as well. Just like it’s played out in recent months, more and more of the Redditors who sent it rocketing in a year ago will make their exit.

If you’ve never dabbled in GME stock, now’s not the time to start. Its slow and steady decline in price will carry on.

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.