Should I buy GameStop stock?

The GameStop stock price is moving higher again. Is another buying frenzy starting? Perhaps. Will it last? I don’t think it will.

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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.

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The GameStop (NYSE:GME) share price is $254. A year ago, it was around $5. That means the GameStop stock price has risen an extraordinary 5,000% over the course of 12 months. Most of the price action has happened in the last five months. Calling the GameStop share price volatile might be an understatement.

A short-squeeze for the ages

The story of the GameStop share price action in 2021 is fascinating. Several hedge funds and other institutions and individuals had sold GameStop stock short in 2020 as it began to rise during the bull run in stocks. The bet was that the stock price would fall. A coordinated buying effort, arranged across social media and forums, sought to scupper these plans by forcing the price higher. This would result in a short-squeeze, forcing shorters to cover (buy back the shares they sold) and incur losses. And, it worked: one notable hedge fund lost nearly 50% on its investments. GameStop stock saw its price soar.

Some of the buyers might have believed in the movement to bring down the financial heavyweights. Others might have just gone along for the ride. Here at the Motley Fool, we encourage investors to take a long-term view. Momentum trading to realise short-term gains is not something that I would encourage. GameStop stock rocketed from $12 to $483 in January before falling back to $39 in February, then up to $349 in March, down to $132 in April, and here we are at $254 at the time of writing. A trader that could time these moves (few can) might have done well, but being caught on the wrong side of these erratic price swings would have resulted in heavy losses.

Trading activity around GameStop is picking up again. This time, however, the narrative is a little different. Gone is the rebuke to the financial big boys theme. Now the fundamentals of the company are said to be strong.

Turnaround plans

GameStop has been struggling. Hundreds of stores were closed in 2017. The company was profitable in 2017 and broke even in 2018, with revenue rising over those years. However, revenues have declined from that point on, and the company has been making losses from 2019 onwards (although they are shrinking). GameStop has struggled due to the rise of online retailers and digital game downloads. When a major game or console is released, GameStop has seen customers rise, only to fall when the release calendar dries up.

The company is trying to remake its stores into places people where to spend time, not just pop in to buy something (which they can do from home), and expand its online store. Allowing rental of PCs loaded with games in store for co-operative gaming is one way it is making its store more attractive. Gamestop is offering retro gaming experiences on otherwise defunct consoles and hosting tabletop game experiences.

Am I buying GameStop stock?

No, I am not buying GameStop stock. I feel that sentiment is driving the GameStop share price. Perhaps I am cynical, but I also worry about the motivations of those leading the charge. The turnaround plans have the potential to stabilise, perhaps even grow revenues. Still, for a company trading at a price-to-sales ratio of nearly four times, I don’t think it will be able to do enough to keep the share price inflated when interest dwindles, and I think it will.

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.

James J. McCombie 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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