A few weeks ago, I wrote a piece about the GameStop (LSE:GME) share price. This was when the hype surrounding the US-listed stock was just beginning. Thanks to a retail-inspired frenzy, the share price saw a so-called short-squeeze. This meant that some institutional investors that had shorted the stock (making profit if the price fell), were forced to close out their positions. Ultimately, the price was moving substantially higher, with more and more people jumping on board each day.
My outlook hasn’t changed
At the time, I said that I wasn’t going to get involved in the stock. A friend of mine did, and sold out for a tidy profit only a couple of days later. I admit that I could have made a quick buck if I’d bought when I was writing my article. The GameStop share price was trading around $65 at that time, and rose to around $450 before plummeting.
The main reason I didn’t get involved was due to the breakdown of the link between the price and the fundamental value. GameStop sells electronics and video games, mainly via a physical store network in the US. It does have an online presence, which is growing. Overall, it’s has seen profitability hit in recent years as people move away from this traditional format of buying games.
In the Q3 trading update, revenue was down 30.2% on the prior year, even with a 257% jump in online sales. If I zoom out, for full-year 2019, the business lost $464m. Total assets have been decreasing from $4.3bn in 2015 to $2.8bn in 2019. This leads me to conclude that the GameStop share price shouldn’t be substantially gaining in value.
GameStop shares: a burst bubble?
As a result of the above disconnect, it was always logical, in my opinion, that the share price was going to fall after the bubble burst. Over the past week it has done, and now trades around $50. From here, I expect the price to fall further, back down to levels around $10. This next leg lower could be hastened by retail traders selling out in large numbers.
What are the alternatives to my view? First, I could see another pump of the stock, if more investors pile in. Those who missed the boat on the first round may jump in as the price moves lower. But this is a short-term view, as eventually I expect the stock to return to a value that reflects the fundamentals of the business.
Another alternative view is that this bump in the GameStop share price could cause a shift in the business. For example, the management team could raise new capital at the current price, with the high market capitalisation currently at $3.57bn. The company could issue more shares at a slight discount to the current share price, raising new funds. It has also gained a huge amount of publicity from the share price spike. It could put a positive spin on this by enhanced marketing. A push towards more online sales is also another avenue to explore.
So clearly, there are issues and opportunities too. If the business doesn’t seize this opportunity to transform itself, I don’t see myself buying the stock. If we see the retail crowd turn its focus to the next stock in demand, GameStop could very quickly be yesterday’s news story.
jonathansmith1 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.