Everything The Markets Have Wrong About GameStop (and One Thing They Have Right)

GameStop went from a storefront in the mall to a global stock market sensation during the height of the COVID-19 pandemic. The stock skyrocketed from where it had been putting around $5 or less per share to over $80 in the blink of an eye.

Now that GameStop is back in the news, we look at what investors should consider before buying or selling.

The Gamestop frenzy during COVID

The concept of “meme stocks” matured during COVID as millions of retail investors locked at home rallied around a few stocks they deemed to be undervalued. GameStop was the first big target. As the price shot up, short sellers lost big, and some prominent investment funds went bankrupt over the order.

While Redditors at the Wall Street Bets community cheered and professional short-sellers licked their wounds, the frenzy slowly faded away. But the GameStock craze never totally vanished. The stock is down about 50% from its peak, but it still holds a strong value compared to the years spent below $20 per share.

GameStop wasn’t alone in the meme stock frenzy. Movie theater stock AMC also went along for the ride with its own impressive spike starting after a low under $3 in early 2021 to a high of around $60 per share that same year.

Now Gamestop is back in the news

The meme stocks slowed down for a while, but GameStop and its compatriots are back in the news. GameStop, AMC and Bed Bath & Beyond all swung upward in a recent stock mania. On August 8, 2022, BBBY was up 39%, GameStop was up 8.5% and AMC by 8%. GameStop and AMC were both temporarily halted in early trading due to price volatility.

Despite no major financial, economic or product news, all three of these meme stocks rose big to start the week. Mentions of all three stocks also increased on Wall Street Bets. This suggests that investors there are rallying to take the stocks “to the moon,” a common adage shared during the crypto boom around the same time of the meme stock craze during the pandemic.

In a highly followed thread, Redditors compare the recent price spike at Bed, Bath & Beyond to the January short-squeeze of GameStop stock. A short-squeeze is a market phenomenon where the available shares for sale are less than the open short positions, meaning there isn’t enough stock to cover short seller positions if they want to exit.

To learn more, check out the Q.ai Short Squeeze Kit for investments in this unique category of stocks. The Short Squeeze Kit gathers historical and technical financial intel on thousands of US equities, including relevant sentiment information.

The only major connection between any of these three meme stock companies is a board member in common between GameStop and Bed Bath & Beyond. GameStop Chairman Ryan Cohen led great successes at Chewy and disclosed a nearly 10% stake in the home retailer earlier this year. Cohen maintains a seemingly cult-like status in the Wall Street Bets community.

Gamestop fundamentals and long-term prospects

While some traders earn a profit following the news, savvy long-term investors focus more on a company’s reported financial performance than what’s happening on social media.

Here are some key facts and figures investors should keep in mind when evaluating GameStop:

Revenue and profit trends

The latest financial release from GameStop indicated $1.38 billion in quarterly earnings, up about $100 million annually. However, growing revenue masks other issues at the retailer. Like last year’s period, the company saw a first-quarter loss. However, the losses were bigger this year despite higher revenue. In total, performance was worse by about $100 million annually.

While Wall Street Bets is excited at the prospects of GameStop, in reality, the company is losing money. For the full year of 2020, the company experienced a $215 million net loss. In 2021, it lost an even worse $318 million. Despite a booming retail economy, GameStop has lost a lot of money in the last two years.

The company runs with an operating loss, which is far from ideal for an aging retailer at a time when online sellers are wiping out malls and traditional sellers.

balance sheets

The GameStop balance sheet is a brighter area than its income statement. As of the end of Q1 2022, the company held $3.1 billion in assets and $1.7 billion in liabilities. That leaves shareholders with a healthy $1.4 billion equity position.

With current cash holdings, the company can sustain these losses for a few years without additional borrowing or outside investment. With such a high stock price, it’s certainly not a buyout target, so the company needs to get creative to turn those losses around, or they may prove that the short-sellers had been right all along.

Weighing AMC and Bed, Bath & Beyond

How does GameStop stack up against the other meme stocks in the headlines?

Here’s a breakdown of their financials:

AMC

AMC is another loser when it comes to net income results. For Q1, the company lost $121 million. For the last full calendar year, the company lost $1.3 billion. While that’s a big improvement from a $4.6 billion loss at the heart of the pandemic, the company is still spending faster than its bringing in revenue.

Here, the balance sheet is not a bright spot. The company claimed $9.8 billion in assets and $12.1 billion in liabilities at the end of June 2022. That’s a negative shareholder’s equity of $2.3 billion. The stockholders would get nothing if the company shut down and sold everything today. Is that something you want in your portfolio?

Bed, Bath & Beyond

If you see a trend here, you won’t be surprised by Bed, Bath & Beyond. The company is another net loser, with a $358 million loss for the last quarter. For fiscal 2021, the company lost over half a billion dollars, $560 million altogether. That’s fairly consistent with the previous full year.

The balance sheet of this company is also upside down, similar to AMC. The company reported $5.0 billion in assets at the end of the last quarter and $5.1 billion in liabilities, with a $220 million gap leading to negative shareholder equity. Unless the company can stage a major turnaround, it’s unclear what meme stock buyers see aside from a shot at quick profits from short-term volatility.

Key takeaway: Tread carefully with meme stocks

As you can see, the financial position of GameStop is far from perfect or certain. While meme buyers pressing the stock up see value in the company’s assets and long-term potential, piling losses are a big reason to keep the stock out of your portfolio.

At the end of the day, it’s up to you to pick the best mix of stocks for your short-term and long-term financial goals. Depending on your trading or investment style, GameStop may or may not be a part of that puzzle.

Just remember: Investing in meme stocks can be especially risky. While snagging some viral stocks can feel tempting, merely reacting to frenzy can make for emotional investment moves instead of strategic ones. Q.ai’s Limited Edition Kits are here to help you tap into trends without sacrificing strategy.

With well-balanced and diversified Limited Edition Kits, you can participate in potentially lucrative short-term investing trends without the associated risk.

Leave a Comment