The GameStop share price surges! But I won’t touch it with a bargepole

The GameStop share price surged around 70% in pre-market trading after an influential trader pointed to a huge $115.7m holding in the meme stock.

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The GameStop (NYSE:GME) share price has made headlines again in recent weeks. It’s drawn the attention of traders, retail investors, and market analysts, reminiscent of the frenzy seen during the 2021 short squeeze.

So, why wouldn’t I touch this stock with a bargepole?

What’s happening?

GameStop shares were trading 70% up on Friday’s closing price in the pre-market. However, when the market opened on Monday, the stock fell from around $40 per share to $30.

It’s still up on Friday’s closing price.

As a reminder, GameStop isn’t a sexy tech stock, it’s a video game and collectables retailer. Before 2021’s meme stock craze, it was a company in decline. Many traders held ‘short positions’ in the stock, as they believed the share price was likely to fall.

Then, in 2021, GameStop was the subject of a short squeeze when Reddit users drove up its stock price, forcing short sellers to buy the shares back at higher prices. This resulted in the short sellers, including hedge funds, losing billions of dollars.

Another short squeeze

Once again, it’s all about social media.

On Sunday, Keith Gill, who has a considerable following among Reddit’s trading community, and who goes by the names DeepF******Value on Reddit and Roaring Kitty on YouTube and X, posted a screenshot of what many assume to be his portfolio.

According to the post, Gill holds 5m shares of GameStop, valued at $115.7m, based on Friday’s closing price. This follows Gill’s return to social media earlier in May after a three-year break. On 12 May, his post suggesting that he was watching the stock led to a buying frenzy in GameStop.

It’s like the short squeeze of 2021, but seemingly less successful.

With the share price surging in May, GameStop raised $933m through a stock sale. Short sellers lost as much as $1.5bn.

Why buy a meme stock?

Shares in GameStop surged on Robinhood’s 24-hour exchange on Sunday evening and gained further momentum in the pre-market on Monday morning.

The stock is currently up 32% over five days. But why?

Well, as before, the rally appears to be driven by renewed enthusiasm from traders and retail investors, particularly those active on social media platforms like Reddit’s WallStreetBets and r/SuperStonk.

However, these investors aren’t speculating on the stock’s potential. It’s a “meme stock,” where social media-fuelled enthusiasm from retail investors creates significant price volatility.

Why I’m not investing

Of course, investing in meme stocks could give me the opportunity to earn big quickly. But I’m not desperate and I could also lose big quickly.

Instead, I invest for the long run, choosing stocks that are undervalued relative to their prospects.

While GameStop’s cash position has improved significantly thanks to the recent share sale, I’m not investing in the business.

The stock is currently trading at 2,314 times forward earnings. That makes it vastly overvalued and just not something I would consider.

It’s worth noting that some of GameStop’s intrinsic value is linked to the likelihood of future meme rallies. But, it’s not something I’m going to waste my time on.

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.

James Fox 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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