I was right about the GameStop share price. Here’s what I’m doing now

With the GameStop share price coming back down to earth quickly, Jonathan Smith explains how he still wouldn’t buy in even at current levels.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

A few weeks ago, I wrote a piece about the GameStop (LSE:GME) share price. This was when the hype surrounding the US-listed stock was just beginning. Thanks to a retail-inspired frenzy, the share price saw a so-called short-squeeze. This meant that some institutional investors that had shorted the stock (making profit if the price fell), were forced to close out their positions. Ultimately, the price was moving substantially higher, with more and more people jumping on board each day.

My outlook hasn’t changed

At the time, I said that I wasn’t going to get involved in the stock. A friend of mine did, and sold out for a tidy profit only a couple of days later. I admit that I could have made a quick buck if I’d bought when I was writing my article. The GameStop share price was trading around $65 at that time, and rose to around $450 before plummeting.

The main reason I didn’t get involved was due to the breakdown of the link between the price and the fundamental value. GameStop sells electronics and video games, mainly via a physical store network in the US. It does have an online presence, which is growing. Overall, it’s has seen profitability hit in recent years as people move away from this traditional format of buying games. 

In the Q3 trading update, revenue was down 30.2% on the prior year, even with a 257% jump in online sales. If I zoom out, for full-year 2019, the business lost $464m. Total assets have been decreasing from $4.3bn in 2015 to $2.8bn in 2019. This leads me to conclude that the GameStop share price shouldn’t be substantially gaining in value.

GameStop shares: a burst bubble?

As a result of the above disconnect, it was always logical, in my opinion, that the share price was going to fall after the bubble burst. Over the past week it has done, and now trades around $50. From here, I expect the price to fall further, back down to levels around $10. This next leg lower could be hastened by retail traders selling out in large numbers.

What are the alternatives to my view? First, I could see another pump of the stock, if more investors pile in. Those who missed the boat on the first round may jump in as the price moves lower. But this is a short-term view, as eventually I expect the stock to return to a value that reflects the fundamentals of the business.

Another alternative view is that this bump in the GameStop share price could cause a shift in the business. For example, the management team could raise new capital at the current price, with the high market capitalisation currently at $3.57bn. The company could issue more shares at a slight discount to the current share price, raising new funds. It has also gained a huge amount of publicity from the share price spike. It could put a positive spin on this by enhanced marketing. A push towards more online sales is also another avenue to explore. 

So clearly, there are issues and opportunities too. If the business doesn’t seize this opportunity to transform itself, I don’t see myself buying the stock. If we see the retail crowd turn its focus to the next stock in demand, GameStop could very quickly be yesterday’s news story.

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 assessed. 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.

More on Investing Articles

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Growth Shares

This FTSE 250 stock has beaten the index by around 10x over the last year

Jon Smith rates a FTSE 250 stock that has smashed the broader index performance and could keep going based on…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

B&M shares are at record lows! Is now the time to consider buying?

The retailer, demoted from the FTSE 100 to the FTSE 250 last year, continues to struggle. But are B&M shares…

Read more »

Investing For Beginners

2 reasons why the stock market could hit 10,000 points by December

Jon Smith explains how the makeup of the UK stock market and the current valuation could support a move towards…

Read more »

Queen Street, one of Cardiff's main shopping streets, busy with Saturday shoppers.
Investing Articles

Why this FTSE 100 rocket is this investment trust’s number 1 holding

A UK investment trust is certainly going against the grain by having this FTSE 100 share as a high-conviction holding…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

These 2 FTSE growth stocks jumped 8% and 4.5% today!

Ben McPoland takes a closer look at a pair of FTSE stocks that are performing really well recently. Why are…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »