Why Now Is NOT the Time to Buy GME Stock
Recently, I begged people not to invest in video game retailer GameStop (NYSE:GME) yet. I suggested that GME stock needs to hit $20 before anyone should jump into the trade. Even after a post-earnings rally, I’m standing by the wait-for-$20 strategy as GameStop’s financials aren’t as stellar as some perma-bulls might assume.
Don’t get me wrong — I fully understand the temptation to grab shares of GameStop and hope for another Reddit-fueled rally. After all, there’s nothing more satisfying than beating the wealthy short sellers at their own game.
Bear in mind, though, that you’re investing in a business, not just a stock. Fundamentals do matter, and it could be game over for GameStop’s investors if the company can’t demonstrate progress toward profitability.
GME Stock Traders Went Haywire
GME stock closed at around $22.26 on Dec. 7. The trading volume was heavy as Wall Street braced for GameStop’s third-quarter 2022 earnings release. The next day, Dec. 8, the shares closed at around $24.79 for an 11% gain.
Were GameStop’s quarterly results so great that they warranted an 11% share-price run-up? Or, is it possible that some traders were giving in to FOMO — fear of missing out? Perhaps, they hoped to catch the next big meme-stock spike before it was too late.
The very next day, Dec. 9, GME stock was already falling fast and heading back toward that crucial $20 level that I had previously warned you about. It’s a sensible strategy to pick a level with historical support and then wait patiently for the stock to decline to that price point before placing a trade.
In any case, clear-minded investors should consider a company’s financials rather than focus solely on a stock’s price action. So, let’s see if GameStop’s quarterly results actually justified a FOMO rally.
GameStop Has to Climb Out of a Deep Hole
Video games aren’t quite the red-hot commodity that they were during and immediately after the Covid-19 crisis. Plus, inflation made it more difficult for consumers to afford video game purchases in the months leading up to the holidays. Additionally, GameStop’s digital-wallet ambitions were crimped by the “crypto winter” of 2022 and the bursting of the non-fungible token (NFT) bubble.
These factors, among others, weighed on GameStop’s third-quarter fiscal 2022 financial results. As it turned out, the company’s net sales of $1.186 billion lagged the $1.297 billion generated during the prior year’s third quarter. Analysts, meanwhile, had hoped to see $1.36 billion in quarterly revenue.
Turning to the bottom line, GameStop posted an earnings loss of 31 cents per share, versus Wall Street’s forecast that the company would only lose 28 cents per share. The situation also looks bleak when we extend the time frame. During the 39 weeks ended Oct. 30, 2021, GameStop incurred a $233.8 million net loss. Fast-forward to the 39 weeks ended Oct. 30, 2022, and the company sustained a net loss of $361.3 million during that time.
Don’t Fall Victim to the FOMO Trade With GME Stock
GameStop’s financial hole, it seems, has only deepened. If you’re doing anything with GME stock besides flipping it for a very short-term trade, be careful.
Sometimes, the market gets it “wrong” by reacting irrationally to a company’s earnings report. In the case of GameStop, there were undoubtedly some FOMO traders pushing the share price up. They might already regret their haste. You don’t have to join them, as GameStop’s fundamentals don’t justify a long share position now.
On the date of publication, David Moadel 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.
