GameStop (GME) share price: is this the end of the road?

Jonathan Smith explains how he thinks the GameStop share price could be under pressure as the market moves on to new oppourtunities.

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The story of the rise of the GameStop (NYSE:GME) share price over 2021 has been well reported. It’s still incredible to think that at the end of last year shares were trading at just under $19. After three sharp rallies over the course of this year, none of them have managed to break the initial highs we saw of a daily close above $347. Shares are now down 50% since the last rally at the beginning of June. So is this the end of the road for the original Reddit stock?

The story so far

It’s hard to succinctly pen down the full story of how the GameStop share price currently trades around $150. The initial rally was fuelled by a couple of key elements. First, the presence of Reddit and other Internet chat sites brought together a mass of retail traders that united their focus on a few stocks. This helped to push the price higher.

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Second, institutional investors that were shorting GameStop were forced to close out their positions as the price moved higher. Shorting the stock would profit if the share price fell. However, given the losses when the price rises, funds were having to buy back shares quickly which only added fuel to the fire.

After this initial buzz during Q1, the GameStop share price fell significantly. It saw a similar rally in March, topping out around $265 before falling again. In early June, a third strong rally saw the price climb above $300, before again falling off down to current levels.

The real value in the GameStop share price

During this period, investors were largely trading on speculation. The fundamentals of GameStop are not great in my opinion. The latest figures for Q1 2021 showed a net loss of $66.8m. This was smaller than the loss at the same period last year, that of $165.7m. 

One driver behind the improvement (if you can call it that) was an increase in sales of 25.1%. I note this as good, along with the continued push of store closures to focus more online. Yet the business has been loss-making for years and I don’t see this trend materially changing anytime soon.

Even with the GameStop share price at $150, this still gives the company a valuation that’s too rich in my opinion. However, the company is taking advantage of the high share price. It issued 3.5m new shares back in April, raising over $550m. 

I personally feel the GameStop share price has run its course with speculative investors, yet doesn’t hold fundamental value at the current price. Therefore, I won’t be investing anytime soon as I think the price could easily fall further. 

I think Reddit stocks in general will continue to be hot picks, but the discussion forums appear to have moved on from GameStop. In order to stop myself from having to chop and change month by month, I prefer to buy and hold stocks for the long term. Some of the stocks I like in this regard are mentioned in more detail here

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jonathansmith1 and The Motley Fool UK have 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.

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