After jumping 74% in a day, is the GameStop (GME) share price primed to rally further?

Jon Smith explains the reason behind the crazy move higher in the GameStop share price yesterday, along with where he thinks we go from here.

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I really had a chuckle yesterday (13 May) when I saw both the jump in the GameStop (NYSE:GME) share price and the reason behind it.

Part of this is exactly why I love the stock market and the behaviour of investors. Yet the other part has me tearing my hair out at what’s going on when I compare it to more rational long-term investing.

Here’s what I mean.

Stranger than fiction

Keith Gill is a retail trader known as the “Roaring Kitty”. During the meme stock boom during the pandemic, he was one of the main faces that helped to catapult the GameStop share price higher. During this period, GameStop shares whipsawed higher and lower, creating a huge amount of speculative interest from retail investors.

I call it speculative because GameStop as a business had little going for it fundamentally. In fact, institutional investors were shorting the stock, a strategy that profits if the stock falls in value. Part of the reason why the share price surged so much initially during the pandemic was these investors rushing to limit their losses as the stock rose.

Fast forward to yesterday. The Roaring Kitty had been absent from his X account for years, but posted a picture of a man leaning forward in a chair. That’s it. Nothing more. Yet this sparked the retail crowd to jump into action, concluding that this related to him being back interested in GameStop.

As a result, the stock jumped 74%, with it up over 100% at some points during the trading day. Thanks to that, it’s now up 47% over the past year.

The next act

In the coming days, I wouldn’t be surprised to see the stock rally even further. Those who missed out on the party yesterday could look to buy the stock, although this is likely more out of hope than anything else. The fear of missing out (FOMO) is also another factor at play that could cause the stock to keep moving higher.

Yet when the dust settles, I don’t see the rally lasting that long. As we saw in the past, the share price eventually moves lower as speculative traders exit. In the long run, the share price should reflect the actual value of the business.

On that front, GameStop released 2023 results in late March. It showed that revenue was down from $5.9bn in 2022 to $5.3bn last year. It did manage to post a small profit (adjusted EBITDA) for the year of $64.7m, which was better than the loss from 2022. However, relative to the size of the business, it’s nothing to write home about.

When I take a step back, I wouldn’t be investing in GameStop if there wasn’t the huge speculative buying activity going on. It’s not a business that I think has great growth prospects going forward. Even though I could likely make a few quick bucks buying and selling it quickly, this isn’t my style of investing. So on that basis, I’m going to sit this one out and watch with my popcorn on the side lines.

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 assessed. Consider taking independent financial advice.

Jon Smith 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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