The big two

Both companies have fallen a long way from record highs in 2021. Retail investors had famously banded together to buy the shares, pushing the price up, and leading to sell orders triggering for some who had short positions. This series of events is known as a short squeeze. It led to a cycle of further surges, and eventually some controversial buying restrictions by brokerages.

AMC has experienced a 32% year-on-year decline, but with Gamestop up 41% over the same period.

AMC’s $8.7bn debt burden looms large, especially with interest rates near to recent highs. Annual revenue is a healthy $4.49bn, with a gross margin of 12%, but with a concerning net profit margin of -8.15%. Perhaps most alarming is a debt-to-equity ratio of -255.5%, suggesting significant financial challenges.

Looking ahead, the company is forecasting solid annual earnings growth of 46% for the next five years. However, as management continue to increase the number of shares outstanding, up 128% in the last year, debts and negative shareholders’ equity present significant risks.

With a market capitalisation of $10.2bn and a price-to-sales ratio (P/S) of 2.1 times, Gamestop’s valuation also appears stretched relative to traditional retail metrics.

The company’s annual revenue stands at $4.92bn, with a gross margin of 25.45% and a net profit margin of 0.51%. While GameStop has achieved profitability, analyst projections of a 27.4% annual earnings decline over the next three years raise concerns about sustainable growth. Whether the firm can successfully transition from bricks-and-mortar to e-commerce is unclear.

Is there an opportunity still?

So when evaluating these meme stocks, it’s essential to consider performance relative to industry peers and broader market trends. GameStop’s price-to-book ratio of 4.9 times far exceeds the S&P 500 average of 3.8 times, while AMC’s isn’t meaningful due to negative equity. Moreover, the beta values, that compare volatility to the wider market, have GameStop at 1.77, and AMC at 2.14, underscoring that these stocks aren’t for the faint hearted.

Yes, both companies are pursuing strategic shifts to adapt to changing market dynamics. GameStop’s e-commerce pivot and AMC’s digital initiatives could drive future growth. Broader economic factors, including inflation trends and consumer spending patterns, will significantly impact these discretionary spending-focused businesses. But we can’t move past the reality that events and community-led enthusiasm are the key drivers behind the movement of these stocks.

With plenty of investors still holding large short positions in these companies, both remain susceptible to new short squeeze events. This presents opportunities for short-term traders, but enormous risks for long-term investors. As a long-term Fool, these aren’t risks I consider worth taking.

I’m not convinced

While the allure of meme stocks persists, I suggest prudent investors should approach AMC and GameStop with caution. Consider these stocks as speculative positions within a diversified portfolio rather than core holdings.

So while companies like AMC and GameStop continue to captivate much of the market, the long-term investment viability remains uncertain. I’ll be keeping my distance.

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A rapid rally

The most incredible retail investor gain I’ve seen was posted yesterday by Keith Gill (known online as Roaring Kitty). He posted showing his account online, owning 5,000,000 shares at $21.27 and Call options at $20. Call options are a form of financial derivative where you pay an upfront premium to have the right to purchase a stock at a particular price. If I purchase the option at $20 and the share price gains, I profit. If it falls, I just lose the premium paid.

Based on the move yesterday and where the share price is likely to open today, Keith Gill would be worth a billion dollars just from his GameStop shareholdings. That’s a figure I think few of us would even contemplate making from the stock market over the course of a lifetime, let alone the past month.

Even though Gill is the one making the headlines, I’m sure there are others like him that have made huge gains due to the sharp spike in the stock price of late.

Speculation versus fundamental value

I don’t want to sound bitter, as I’m very happy for Gill and others like him. However, it can give a false impression to newcomers about how to invest in the market.

From what I can see, Gill invested pretty much all of his money in just one stock. That means it’s an all-or-nothing play. There’s no diversification in his portfolio that would help him if the share price fell.

Further, I’d classify this as purely speculative trading rather than investing based on fundamental principles. The share price hasn’t rallied based on strong earnings, a bright outlook or new partnerships. In fact, the 2023 results showed that net sales fell from $5.9bn the previous year to $5.3bn.

It recorded net income of just $6.7m, which is rather incredible based on the current market cap of $14bn. There’s a clear disconnect between how the business is performing and the stock movements.

Not for me

In my view, this shows that GameStop price swings are being driven by speculative buyers and sellers. As a result, I think it’s too high-risk for me to get involved. There’s little rational reason for me to buy at $46 now based on where I think it will be in a years’ time.

So even though I take my hat off to Gill and co, I think we all need to remember that for every billionaire made, many more might end up losing money.

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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.

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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.

The post After jumping 74% in a day, is the GameStop (GME) share price primed to rally further? appeared first on The Motley Fool UK.

The story so far

GameStop is a consumer electronics retailer based the US. The declining demand for traditional store-based video games and films meant that the share price had been falling in the years leading up to the pandemic.

There was a large amount of short interest, referring to investors that are looking to profit from a fall in the share price. Shorting a stock can be done by borrowing the share from an existing shareholder with the aim of buying it back later at a lower price. The difference between the initial price and the price when it comes to buying it back is the profit generated.

Given that the potential loss on shorting a stock is unlimited (the share price could surge to infinity), GameStop shares saw large volatility as retail investors piled in and bought the stock. This caused other investors who were short to hurriedly buy back shares, further pushing the price higher.

Details of the GameStop stock split

Rumours about a stock split have been in the market since the start of the year. Given that the price is still elevated at $128, a stock split will cause the price to fall. This should make it more attractive for retail investors to buy, as would be cheaper.

A stock split has no fundamental impact on the value of a company. In the case of GameStop, for every one existing share held, three new extra shares will be given. As a result, the number of shares in circulation increases massively. This causes the share price to fall, but the market capitalisation will stay the same. At a simple level, one share worth £100 gives the same value as 10 shares trading at £10 each.

The extra shares will be given out in two weeks time.

Should I get involved?

Despite the buzz around the stock split, it doesn’t change the value of the company at all. Sure, historically, split at other large companies contributed to short-term rallies. It’s also good news for retail investors to be able to afford the stock. But for me, I don’t see any value here.

The business is trying to pivot to more online sales and is also trying to get involved in the NFT space. But as we currently stand, I’m not interested in buying shares in an outdated electronics retailer.

Even with the share price down 33% over the past year, it’s up over 30 times over two years. I struggle to be able to see how this is fundamentally sound for the long term. On that basis, I’m staying clear.

The post With the GameStop stock split, is now the time to buy? appeared first on The Motley Fool UK.

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.

The post As the Gamestop share price craters, should I buy? appeared first on The Motley Fool UK.

In the past three weeks or so, the shares have moved up 23%. What’s going on?

GME: an unremarkable business but remarkable share

The GME business is a sort of HMV, whose primary focus is video games. As retailers from HMV to Borders have found, a decline in demand for physical products in a digital age can make previously successful business models struggle.

A lot of games are now sold or rented online rather than in physical format through a third party such as Gamestop. It’s worth noting, though, that the Gamestop business isn’t at the end of the road. It still has almost 5,000 stores across the US and other markets. Revenues last year topped $5bn, although the company made a loss. That was the third consecutive year of declining revenue, but clearly Gamestop remains a sizeable business. With the right strategy I think it could survive in some form for decades to come. For example, it could be a physical meeting place for collectibles fans to set itself apart from online games sellers. But as it stands, I don’t think it’s a remarkable business. It has a simple business model in a mature industry, which may also be a sunset industry.

By contrast, GME has been a remarkable share. That is not because of the business fundamentals, but instead is due to the rise and partial fall of GME as a meme stock. Now, it is rising again.

Some traders continue to play the Gamestop share price

I think the recent upwards movement in the GME share price remains tied to traders speculating on the actions of fellow traders, rather than investors assessing the company on a fundamental basis. Currently the company’s market capitalisation is over $16bn. For a loss-making video game retailer that looks excessive to me.

But the remarkable story of GME shares over the past year has made a lot of traders follow it closely. Hoping for further opportunities to get even a fraction of the profits generated by some GME trades earlier this year, I reckon a lot of the explanation for recent GME share price movements lies with traders not investors.

My next move on GME

As an investor not a trader, GME is not for me.

The share price could keep rising — but there’s clearly also a risk that it will crash. When shares get detached from the underlying fundamentals of the business, wild swings in share prices become more likely. Falls won’t necessarily reverse in future. Just because a share price crashes, it doesn’t mean it will ever rise again. Despite the recent rising GME share price, I will be giving it a wide berth.

The post Why is the Gamestop (GME) share price rising again? appeared first on The Motley Fool UK.

Currently sitting at just under 200p, the stock seems to have held onto some of its momentum. However, does GameStop have the capacity to push higher in September? Let’s take a closer look.

The story so far

The GameStop share price shot up drastically after being ‘short squeezed’. This typically occurs when a stock is heavily shorted by a large hedge fund, which is betting the price will go down. Retail investors then get behind the share, driving its price up – the opposite of what hedge funds are expecting. Hedge funds pay interest on their shorted shares, and when the share price increases, so does the interest. Once this reached an unsustainable level (when share price increases rapidly), hedge funds buy back their shares, and the stock surges upwards even more.

For GameStop, this plan was cultivated on the online platform Reddit and helped drive the share price up over 1,800%. The GameStop share price has since been extremely volatile, often fluctuating in double-digit percentages daily.

GameStop share price: next steps

There are 76m Gamestop shares outstanding and 63m of these are floated on the exchange for investors to trade. Some 12% of these floated shares (7.5m) are held in short positions. Therefore theoretically, GameStop could be squeezed again. This is the only way I see GameStop shooting up further in the short term.

Looking at company fundamentals paints a bleak picture for the firm. Since 2018, over 1,000 stores have been shut down in an effort to drive up poor margins. The company’s Q2 2021 earnings report highlighted a 25% increase in sales of $1.3bn compared to Q2 2020. However, this figure is rather misleading considering most stores were shut during Q2 2020. Comparing this to Q1 2019, sales were actually down almost 18%.

In addition to this, I feel the GameStop share price is heavily overvalued, trading at almost 16x book value. Considering the firm is still loss-making, the current share price seems absurd to me.

One positive for GameStop moving forward is the $2bn capital it has been able to raise by issuing new shares. This capital will be used to expand the firm’s e-commerce business. GameStop has already announced leases on warehouses in Pennsylvania and Nevada helping spur the online shift. In an increasingly online world, it is important the GameStop expands past its traditional bricks-and-mortar business plan. Although the firm will likely never match e-commerce giants, I think this transition could benefit the GameStop share price down the line.

The Verdict

I think the GameStop share price has the volatility to make double-digit percentage moves in September. However, I don’t think I will see it explode again in September. Personally, the weak financials and outlandish valuation are a red flag for me. However, I am intrigued to see how the GameStop share price story continues to pan out, so will be watching from the sidelines but not buying.

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GameStop has strong backing from retail traders, who’ve pushed the stock up by 3,900% over the last 12 months. However, the shares are also being targeted by short sellers, who reckon this business is now overvalued. With a new management team in place and earnings due in September, I’ve been reviewing the shares. Is this a stock I should be buying?

STONK!

GameStop shareholders have had a rocky ride in recent weeks. Ahead of Tuesday’s rally, the shares were down by 45% since hitting $302 on 9 June. Yesterday’s 20% surge has reduced this loss to 35%, but it’s still a painful drawdown for anyone who bought at the $300 level.

However, we may soon start to learn more about progress at this turnaround situation. Chief executive Matt Furlong and chief financial officer Mike Recupero were both appointed in June, so they may use next month’s earnings report to set out their initial strategy.

Interestingly, both men have come from senior roles at Amazon. I expect to see GameStop moving more of its sales online and perhaps slimming down its store estate. I think we might also see the company looking at opportunities to get involved in esports and livestreaming.

One big advantage

As a turnaround situation, there are several potential outcomes here. No one knows how things will turn out yet.

However, Furlong does have one big advantage — he’s got plenty of cash to work with. In June GameStop issued 5m new shares at an average price of around $225. This raised $1.1bn of fresh cash for the business.

My analysis suggests that based on last year’s losses, the company should now be able to operate for the foreseeable future. More realistically, this extra cash should mean that Furlong can invest in growth opportunities without needing to borrow money.

GameStop share price: what I expect in September

I’m impressed by the credentials of GameStop’s new management team. But the reality is that they only started work in June, so it’s too soon to know whether they can succeed.

GameStop has reported losses of more than $1bn over the last three years, during which its revenue slumped from $8.3bn to just $5.1bn. Turning this ship around may not be easy.

The good news is that the company will report its half-year earnings in September. This will give investors some fresh data to work with. In particular, we’ll learn more about how GameStop’s retail stores are performing as the pandemic eases.

I expect the company to publish earnings around 9 September, based on previous years. I can’t be sure, but if market conditions stay positive, I suspect the figures will get a warm reception, lifting the stock further.

Personally, my sums suggest that the shares are probably fully valued already. GameStop’s profits peaked at $400m in 2016. Achieving that now would value the business at 38 times earnings. That’s too much for me, so I won’t be buying at current levels.

The post Where will the Gamestop share price go in September? appeared first on The Motley Fool UK.

Another stock had a similarly inexplicable rise yesterday. That stock was AMC Entertainment, which moved higher by 20.34%, again without any obvious catalyst. There is a link between Gamestop and AMC — they are both meme stocks.

What are meme stocks?

According to Wikipedia, a meme is an idea, behaviour, or style spread from person to person via the Internet. Social media platforms like Twitter and Reddit are often used to spread a meme. Meme stocks are particularly associated with heavy discussion on the ‘WallStreetBets’ section of Reddit.

Gamestop was once heavily shorted. The hedge funds and the like doing the shorting stood to profit if the Gamestop stock price fell. Using social media like the WallStreetBets sub-reddit, some retail investors coordinated their actions. By buying together they increased the price of Gamestop stock and forced the hedge funds to realise heavy losses.

Other stocks with significant short interest, like AMC, became meme stocks and experienced wild price moves. But over time, the rationale for buying meme stocks espoused on social media has changed. It is not just about teaching the hedge funds a lesson any longer.

Is Gamestop stock a good investment?

Reddit participants, and other investors, have argued that Gamestop stock actually had a compelling investment case, even at eye-watering prices. The argument is that the traditional bricks and mortar retailer has a digital strategy that will deliver. Also, concept stores, themed around retro games, for example, and offering e-sports hubs and tabletop games evenings will make the most of the company’s existing retail footprint. 

Gamestop narrowed its losses from $(6.59) per share in 2019 to £(3.31) in 2021, suggesting it is making a turnaround. Analysts forecast that Gamestop will have positive earnings per share of $0.07 in 2023, reversing a long history of losses. However, with the price where it is now, Gamestop stock is trading at over 2,000 times its forecasted 2023 earnings per share. That is an extraordinarily high multiple. Gamestop would have to deliver revenue and earnings growth far above consensus expectations to make that multiple even approach a reasonable level.

What’s next for the Gamestop stock price?

The Gamestop stock price rocketed yesterday with no identifiable change in its investment case. I cannot find evidence that the short interest in Gamestop increased yesterday, possibly explaining its stock price rise as retail investors took on the hedge funds again.

It would seem Gamestop’s price rise yesterday was down to buzz about the stock being generated on Reddit and other social media channels on an otherwise quiet day in the markets. And that’s the trouble with meme stocks like Gamestop. They can rocket 30% in a day and fall by that much just as quickly, often leaving investors puzzled as to why.

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