Reddit stocks: should I buy GameStop at $220?

Reddit favourite GameStop, the original meme stock, seems wildly overvalued and extremely volatile. Is there more to GameStop than meets the eye?

| 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.

GameStop (NYSE: GME) was a top gainer in the US markets yesterday, rising 10% to close at $220.40. It is one of the most volatile US stocks; in January, experiencing a short squeeze at the mercy of the Reddit army, it swung from lows of $17 to highs of over $500. Six months later, the Reddit stock’s price remains unpredictable.

So why is GameStop soaring?

The company has made headlines for taking advantage of its giddy share rally, raising $1,126,000,000 from the sale of 5,000,000 common shares. This is in addition to the $500,000,000 raised in April.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

GameStop is now in very strong financial position. With long-term debt paid off, and a war chest of almost $2,000,000,000, there is a strong argument to be made that GameStop is now a serious investment opportunity. In GameStop’s latest earnings report, sales had risen 25% in the first fiscal quarter, and are expected to continue to rise.

GameStop’s new chairman Ryan Cohen, the co-founder and former CEO of Chewy, grew the largest pet supplies business in the USA. Cohen was told that there was no money in pet supplies. Yet a year after he stood down, the company’s IPO valued itself at $8,700,000,000. If nothing else, he has a track record of financial success in an adverse market.

Cohen has recruited top level executives from Amazon and Google including Elliott Wilke, Matt Furlong, and Mike Recupero. Cohen plans to turn GameStop into the “Amazon of gaming,” pivoting the business towards a profitable e-commerce model.

Part of this plan is to create GameStop’s own blockchain of NFTs (non-fungible tokens), and I speculate this could be used to create a third-generation online gaming experience.

The Reddit army

Then there’s the near fanatical loyalty of the Reddit army composed of millions of traders from the sub-reddits r/Wall Street Bets, r/GME, and r/Super Stonk.

Traders are holding GME shares with ‘diamond hands,’ and not selling regardless of where the price goes. It is worth noting that many are emotionally invested into the company that helped form their childhood. 

This herd mentality has ultimately saved the Reddit stock from collapse. In addition, short interest is over 20% of the current float, and many Redditors hope for another January style short squeeze.

There are risks with investing into GameStop at this price point. The stock is extremely volatile, and many hedge funds expect it to fall soon. The SEC recently announced an investigation into its share activity, which could be a worrying indicator.

A tale of two companies?

GameStop is overvalued based on past metrics. However, if Ryan Cohen converts GameStop into the Amazon of gaming, this price could look cheap for the Reddit stock. He has succeeded before with Chewy.

I will be buying a few shares as a small percentage of my portfolio. I believe that this is a high-risk trade that could deliver large returns in the long term. However, this level of risk will be contained to only a small proportion of my portfolio, and if I were a risk-adverse investor then I’d avoid GameStop altogether. To read more about the risks, please read the opinion of my Foolish colleague, James McCombie.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Charles Archer 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.

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.

More on Investing Articles

Social media and digital online concept, woman using smartphone
Investing Articles

Will Lloyds shares recover in 2022?

Lloyds shares have struggled this year and the looming recession won't help. But I'd still buy them today.

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Investing Articles

Can the stock market make me rich even now?

Here are three ways I'm coping with the stock market's recent bout of weakness and aiming to build wealth in…

Read more »

Cogs turning against each other
Investing Articles

3 top investment trusts to buy right now

Investment trusts offer a wide range of options for investors. And in troubled times, they provide some safety through diversification…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Why hasn’t the FTSE 100 crashed in 2022?

The catastrophic events of 2022 have left investors around the globe fearing the worst for stock markets. And some have…

Read more »

Trader on video call from his home office
Investing Articles

2 inflation-resistant FTSE 100 stocks to buy today

Soaring inflation could dent my returns if I don't take care. Here are two top inflation-resistant FTSE 100 stocks I'd…

Read more »

Tabletop model of a bear sat on desk in front of monitors showing stock charts
Investing Articles

Why a bear market is an investor’s best friend

A bear market can certainly be scary. But any investor tempted to sell might benefit by looking at Warren Buffett's…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The Rolls-Royce share price could be stuck below £1 for a while. Should I buy?

The Rolls-Royce share price has been trading at penny stock levels since April. Could the stock be a bargain at…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’m aiming to make £45,000 in passive income with UK shares and never work again!

Investing regularly in UK shares can generate a substantial passive income over the long run. Zaven Boyrazian demonstrates how.

Read more »