As the Gamestop share price craters, should I buy?

The Gamestop share price crashed last week. Our writer considers whether he ought to to add it to his portfolio at its current price.

| 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.

Last week was a painful one for investors in Gamestop (NYSE: GME). The Gamestop share price fell 19% in just one week, based on Friday’s closing price on the New York market. It’s still up over 1,100% in the past year, admittedly. But I don’t think last year’s share price crash presents me with a buying opportunity for my portfolio. Here are three reasons why.

1. Yesterday’s business in tomorrow’s world

Back in the 1980s and early 1990s, there was a massive business called Blockbuster. In the UK, like the US, it was present in towns and cities across the land. Over time, though, demand for renting video cassettes plummeted. Blockbuster tried to update its business model but it was too little, too late.

Gamestop has been facing similar market dynamics in some ways. Its core business of selling physical computer games has come under pressure as more game sales take place online. That doesn’t mean the business is finished. A lot of gamers still like to buy physical games in a shop. Gamestop has beefed up its business model with ancillary revenue streams. Nonetheless, the business risks becoming outdated. That could lead to revenues falling,  as happened last year.

I think Gamestop could use its large presence, customer loyalty, and gaming expertise to turn its physical store estate into an asset with enduring relevance. But there’s no guarantee that approach will work.

2. Heady valuation

Gamestop shares have been caught in a speculative frenzy this year. As an investor not a speculator, that always concerns me.

It’s been good and bad news for Gamestop in my view. A higher share price has enabled Gamestop to raise cash by issuing shares. However, it also means the Gamestop share price is now out of step with the company’s value, in my view. Currently, the Gamestop market capitalisation is around $15bn. For a loss-making company in an industry with an uncertain future, that seems expensive to me. Even if I thought the fundamentals of the Gamestop business were attractive – and I don’t – I’d still be hesitant to buy shares at such a high price.

3. The Gamestop share price and wild sentiment

Many share prices reflect the tension between a company’s business fundamentals and how investors feel about its shares. The latter phenomenon, sentiment, can be a powerful force.

As we’ve seen over the past year, the Gamestop share price has been on a wild ride largely disconnected from its business performance. That’s because its shares have seen a speculative frenzy. While that has died down from its heights, Gamestop remains popular with many speculators. As last week showed, it is still subject to dramatic price swings.

Speculation can keep a share price detached from the business fundamentals for months or even years. Not only can it keep a share price improbably high – it can also  punish a good company by consistently leading to it being undervalued. Right now, not only do I think the Gamestop share price is overvalued, I’m also concerned that ongoing speculation could sustain an imbalance between its worth and cost. That is a risk for an investor like me. Despite its share price fall last week, I won’t be buying Gamestop for my portfolio.

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.

Christopher Ruane 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

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

2 of the best stocks to buy now with £500

I think that Berkshire Hathaway and Activision Blizzard are two of the best shares to buy today. I think they…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I bought 10 cheap shares. Here’s what happened next

After recent price falls, we bought 10 cheap shares for extra passive income in future. This mini-portfolio offers a tasty…

Read more »

Close up view of Electric Car charging and field background
Investing Articles

Is now a good time to buy Chinese EV stocks as economic growth slows?

Chinese EV stocks tend to trade at a considerable discount to their US counterparts. And that's one reason I like…

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

I’d happily start investing in today’s stock market – here’s why

The stock market has been moving up even as the economy has been looking shakier. Would our writer start investing…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 22% in a month! This FTSE 100 takeover target could rise further

A takeover bid for an FTSE 100 firm is big news. Here's what I'm doing about RS Group shares after…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Income shares could help me turn £300 into £500. Here’s how

Our writer believes investing in the right income shares over the long term could be lucrative. Here is his approach.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I bought these FTSE 250 shares for fat dividends!

These two FTSE 250 shares have gained in value since I bought them recently. But I still see these stocks…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Should I buy this REIT to add to the others that pay me juicy dividends?

Jabran Khan looks closer at this real estate investment trust (REIT) and decides if he would add the shares to…

Read more »