GameStop’s Fundamentals Are a Problem

Just when I thought there might be a nice orderly selloff of GameStop (NYSE:GME) stock, the Reddit crowd is back at it. In the 30 days ending June 1, GME stock jumped 53%. And the only explanation that seems to fit is that the Reddit crowd simply loves to pump up heavily shorted stocks.  

I didn’t expect to be pondering if investors will have to get used to meme stocks becoming part of the new normal. Yet GME stock is trading at nearly $250 per share. 

I can’t see a way that this will end well for the retail traders who have bought the shares. But this is a case where feelings and facts have to be separated. So if you are reading this article with even a tinge of FOMO (fear of missing out), let me explain why GameStop may have a difficult time impressing analysts in 2021.

The Rules Don’t Apply 

Putting all cynicism aside, if the trading volume of GME stock remains high, there is a positive case for the stock due to purely technical analysis. However, based on the company’s fundamentals, there isn’t much reason at all to be upbeat on the shares.  

But as the meme stock frenzy has made clear, the committed traders who perpetuate the bloated valuations of these stocks, including GameStop, do not care about fundamentals. 

 That doesn’t mean, however, that investors should buy GME stock at its current price. One reason to avoid the name is the condition of the global supply chain.  

Expect Post-Pandemic Turbulence 

Prior to the pandemic, the launch of new gaming consoles was expected to be a positive catalyst for GameStop stock. An article on Seeking Alpha from that period stated that the upcoming console launch was one reason GameStop would avoid the fate of Radio Shack. 

And despite all the turbulence of 2020, the launch of new consoles by Sony (NYSE:SONY) and Microsoft (NASDAQ:MSFT) did appear to have some effect on GameStop’s revenue. The company’s e-commerce revenue soared 175% year-over-year. And as InvestorPlace columnist Mark Hake points out, part of GameStop’s plan is to pivot towards being an e-commerce destination for gaming hardware. 

But its overall sales of $2.12 billion was still below the $2.19 billion that GameStop posted in the same quarter in fiscal 2020. If you choose to look at GME stock from a glass half-full perspective, you can point to the supply chain disruptions that will extend the company’s console opportunity for the next several quarters.  

However, I’ll try not to smirk when I mention that those sales are more than baked into the current price of GME stock. And there’s another potential concern.  

Writing for GeekWire, Thomas Wilde brought up a scenario that will directly impact Sony and Microsoft, and have an indirect impact on GameStop. That is, software developers will have limited incentive to develop new video game titles designed for the new consoles if consumers don’t have access to those consoles.  

GME Stock Remains Purely a Speculative Trade 

GME stock has become more stable, although it’s changing hands for well over $200 per share. I’m sure there are some traders who are true believers in GameStop’s ability to transform its business. A more likely explanation for the stock’s current price, however, is traders looking to cash in on momentum.  

Even assuming that the company can make a pivot, its turnaround will take years to assess. Moreover, the chances of it failing are high.  And I don’t expect to see anything in the company’s upcoming earnings report that will change my mind.  

After GameStop made several well-received moves, GME stock is worth more now than it was at the beginning of 2021. And the irony is that the Reddit traders have a great deal to do with that. That’s because, by raising the stock price, they enabled the company to raise enough cash to pay off a good chunk of its long-term debt.  

Yet GameStop faces significant roadblocks to its growth in 2021. As a result, its turnaround is unlikely to be successful. And that makes it hard to buy GME stock.  

On the date of publication, Chris Markoch 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. 

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.