GameStop shares: here’s what I think happens next

After the buzz around GameStop shares, Jonathan Smith thinks the long-term price is likely going to be lower to reflect the actual value of the company.

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It’s interesting to think that the GameStop (NYSE:GME) saga and everything it stood for only really began three months ago. It shows how quickly things are moving in the stock market. I also think it highlights how it’s important to be forward-thinking about stocks in general. But for the purpose of this article, I want to specifically think about what the future holds for GameStop shares and if there’s any value in me buying.

The GameStop story so far

GameStop shares exploded higher in January. A year ago they were under $5 and after starting this year trading around $18, the shares traded above $400 before we even hit February. A crash back down to $40 was met with round 2 that saw a rally above $250 before another crash. As I write, GameStop shares trade at $158.

The initial rally captured my attention for several reasons. First, it was partly driven by a group of retail investors on an internet chat site. The snowballing impact of more and more retail investors buying was a definite driver in the move higher.

I think this also explains the steep crash and the following rally. There’s a definite fear of missing out (FOMO) surrounding the stock, and so this can exacerbate moves as investors sell or buy on momentum.

Another reason for the initial rally was due to the number of institutional investors that were shorting the stock. This term refers to investors who profit if the price of the stock falls. Shorting a stock is the opposite of buying it, and so is usually done if the outlook isn’t positive for a company.

However, if the price actually rises, this causes a loss for those that short the stock. To close out the trade, the investor has to buy back the stock, boosting the share price further. This is what happened with GameStop shares, causing the price to rocket higher.

GameStop shares: further potential?

Since the beginning of this rally, I’ve been clear that I think the move is completely disconnected to the fundamental value of GameStop as a company. 2020 results showed a fall in comparable store sales of 9.5%. The gross profit margin shrank to 24.7%, contributing to a net loss of $215.3m for the year. 

This loss was smaller than the $470.9m in 2019, but is certainly not a set of results that warrants the performance seen in the shares. Even over a 12-month period, GameStop shares would have given me a 32x return.

In my opinion, I think GameStop shares will slowly head lower, with the occasional rapid rally. This is already being seen, with the second rally hitting a lower peak than the first. 

I could be wrong, with the internet chat comments calling for it to hit $1,000. If news coverage continues to put out content on the stock so that more retail investors pile in, the price could rally. Further, if celebrities and respected investors come out in favor of it, this could also see renewed buying interest.

Ultimately though, I expect GameStop shares to retrace back down to circa $20, a level that I think reflects the value of the loss-making business. As a result, the stock isn’t not something I’m looking to buy.

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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