Don’t Read Too Much Into GameStop’s Post-Selloff Bounce

Last month’s rate hike-driven drop for stocks drove another big slide for GameStop (NYSE:GME). But as the market eases slghtly about higher interest rates, GME stock — the one that started the whole meme-stock phenomenon — has started to bounce back.

Briefly falling below $100 per share for the first time in nearly a year, shares in this video game retailer, aspiring e-commerce and non-fungible token (NFT) company have bounced back to triple-digit prices. With this, you may think that the stock’s legion of “diamond hand” fans will have the last laugh.

However, before you dive in and buy after the latest rebound, keep in mind that the bull arguments still being made for GME stock remain flawed. As seen over the past few months, fewer investors are buying these arguments as well as shares. As this continues — combined with the overall waning popularity of meme stocks —  the trip down to a “more rational price” seems inevitable.

With moonshot plays that make a lot more sense out there, there’s just no need to buy GME stock.

GME Stock and the Two ‘Arguments’ Made by Fans

With its extended drop to lower prices, the bulk of retail investors have moved on when it comes to GameStop. That includes those who bought in at too high of a price and were burned. It also includes investors who got in at the right time and rode GME to higher prices. Finally, those who have seen the stock as too chancy from the start have continued to stay away.

So, why is GME stock — the big plunge from its meme highs notwithstanding — still at what many see as inflated prices? There are still enough fans who are unwilling to sell. Why? Well, there’s two reasons.

First, some believe in Chairman Ryan Cohen’s turnaround plan. This plan entails turning the brick-and-mortar retailer into primarily an e-commerce company. It also involves GameStop’s move into areas like NFTs and Web 3.0. Per the bulls, once this happens, GameStop will supposedly be able to justify and add to its current valuation.

Secondly, there’s the “mother of all short squeezes” (or MOASS) argument. Surprisingly, this is still something on the table in the eyes of the bulls. However, while these arguments are still being made in support of the stock, neither is very strong.

Debunking the Bull Case

The turnaround thesis and the MOASS thesis are both helping GME stock avoid a more severe dive. Take AMC Entertainment (NYSE:AMC) for example. This other top meme stock has experienced a sharper nosedive since the start of 2022.

However, while GME fans haven’t lost hope to that extent, it doesn’t mean there’s much weight to the two rationales they’re holding onto. That’s the case with the digital transformation thesis. So far, the company has shown little evidence its plans will pay off. In most cases, uncertainty over a strategic chance isn’t priced-in completely like it is in this situation.

This is also the case with the MOASS thesis. Fellow InvestorPlace contributor Josh Enomoto recently debunked the theories underpinning this argument. Of course, there was a time when shares were over-shorted. The so-called “smart money” — like Melvin Capital and other hedge funds — wound up like deer in the headlights when the Reddit trader army appeared from left field. Unfortunately, though, those days are over.

Only about 15% of the float is currently sold short. With just die-hard investors still long the stock and a few fair-weather fans joining the trade, there’s not enough in play to prove the MOASS argument right.

The Latest GameStop Rebound Won’t Last

Few investors see this stock as bulletproof or invincible. Yet, it is still resilient. Or, at least its long-time fans are resilient, holding on to the belief that a turnaround or the ultimate revenge on Wall Street will send the stock higher again.

Still, there’s not much evidence to back up either argument. The turnaround is a long shot that’s priced as if it’s a lock. What’s more, while the MOASS theory may be emotionally satisfying, there’s little to suggest GME can replicate its last big run.

Put simply, this latest rebound won’t last. To avoid future regrets and a waste of your capital and time, say no to GME stock.

On the date of publication, Thomas Niel did not hold (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.