The GameStop share price jumped 70% last week! Should I buy the US stock now?

Jonathan Smith takes a look into the recent hype surrounding the GameStop share price, and sees whether the spike is fair value going forward.

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GameStop (NYSE:GME) is a US-based company that sells consumer electronics and video games to the public. It relies primarily on physical stores, and has over 5,500 around the world. As such, the GameStop share price has been decreasing in recent years as more and more consumers are able to buy games and add-ons online or within the game itself. Interest in the stock has picked up over the past six months, with the company making headlines last week. In an incredible turn, retail investors have been pushing the share price higher, forcing institutional clients to close their short positions.

Why all the hype?

Like most businesses, GameStop has seen a hit to revenue due to Covid-19. With more sales going online, it is having to transition away from its physical locations and invest more online. Q3 results showed this, with online sales up 257%, but overall revenue down 30.2%. The GameStop share price has struggled for several years, trading around $5 at the end of last summer. This was down from $45 from 2014.

As a result, some hedge funds and investors had shorted the stock. Shorting a stock is when an investor thinks the price will fall, and will make a profit if the share price drops from the level where they shorted it. This carries unlimited risk, as the share price could rise to infinity. When you go long and buy a stock, your risk is limited, in that the share price can only fall down to zero.

The hype around the GameStop share price came in recent weeks when it started to shoot higher, largely down to speculative retail investors buying in. This was compounded after institutional investor Andrew Left came out and said he was short-selling the stock as he thought it was overvalued. More investors piled in and bought the stock, forcing Mr Left to close out his position. To do this, he effectively had to buy the stock (the reverse of his initial move), causing it to shoot even higher.

Can the GameStop share price continue to move higher?

Although this is an interesting example of retail investors versus institutional investors, that’s all I see it as. GameStop isn’t a company with strong fundamental value in my opinion. I’m not saying this is a pump-and-dump situation, but I do think retail investors are pushing the share price higher into a bubble. At $65 a share, the valuation just doesn’t stack up. This is a loss-making company ($18.8m in Q3) that arguably operates in a shrinking sector.

If the company manages to re-invent itself via a complete online offering, then it could return to profitability in the long term. But at present, buying in when the share price is at all-time highs doesn’t make sense for me. Instead, I’ll look closer to home for top British stocks that I’d consider buying at the moment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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