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What’s up with the latest GameStop rally?

What's up with the latest GameStop rally?

Key Findings

  • The meme craze doesn’t seem to be dying down anytime soon as GameStop saw wild swings again on October 31st.
  • GameStop wants to be the Amazon of gaming, but the company continues to struggle financially as soaring inflation continues to weigh on consumer spending.
  • There are concerns about what demand for video games will look like as consumers grapple with higher prices for everyday items.

GME shares were in the news again when trading was in full swing last Monday. GameStop became known for meme stock craze back in January 2021, and it looks like these meme stock rallies will pop up from time to time. Although GME shares are up 688% in 2021 due to coordination between retail investors and some well-known whales, the company continues to struggle financially.

What’s going on with GME stock?

GME shares rose again on October 31 when trading volume skyrocketed. During the first hour of Halloween trading, 12,696,871 shares changed hands. The swing that day marked the biggest intraday reversal since the end of May. Within 10 minutes, trading in GME shares had to be stopped twice.

Shares of GME rose 24% at an intraday high to close about 0.5% above its opening price of $28.31. GME shares then closed on Nov. 3 at $26.21.

We recently looked at the meme stock rally to try and understand what is happening with these companies as retail investors pump up share prices. Many pundits have traditionally relied on “smart money”, which often involves institutional investors, funds, and professionals investing in companies based on equity fundamentals.

There seems to be a gap these days as retail investors invest in stocks with poor financial performance. Events like the “meme mania” are changing the landscape of investing as retail investors rally for stocks without regard to a company’s actual financials.

The stock opened today at $26.35, down more than 30% for the year.

How are the finances of GameStop now?

GameStop last released their financial results on September 7, when they talked about how the company performed for the period ending July 31, 2022. Here are some of the highlights of GameStop’s Q2 financials:

  • Earnings per share were minus $0.35.
  • Revenue was $1.14 billion, short of analysts’ expectations of $1.27 billion and a 4% year-on-year decline.
  • GameStop had a negative return on equity of 33.28% and a negative net margin of 8.57%.
  • Inventory rose to $734.8 million. This worried many investors, although the company said it was preparing for potential supply chain disruptions.
  • Sales of collectibles (the company’s growing revenue stream) totaled $223.2 million.

With net sales down 4% year on year due to software and hardware sales issues, operating losses rose to $107.8 million from $58 million. The company still has $908.8 million in cash and just $32.1 million in long-term debt, so the balance sheet is still considered stable. However, these lackluster financials don’t seem to have anything to do with the meme’s stock-buying frenzy.

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What’s next for GameStop?

The company’s shares are down about 30% for the year. Investors hoped that GameStop could change their business. Here are some of the latest changes made by Gamestop.

GameStop closes physical locations

To boost profits, the company closed several offices. GameStop was able to offset some of the loss by reducing the number of brick and mortar stores from 7,276 at the end of FY 2017 to 4,573 at the end of FY 2021. The company is also trying to move to online sales. where they also offer collectibles and more.

Diversified Income Streams

The company has also focused on expanding its e-commerce platform to sell more collectibles and accessories. A recent story on Reddit showed GameStop staff scoffing at the idea that stores now sell what they classified as “random junk” with items like a lemon watch and an algebra tile set. Some customers have complained on social media that they like it better when GameStop focuses on video games. We will have to see how the collections revenue sector will benefit the company.

Marketplace GameStop NFT

GameStop is working to diversify its revenue streams by tying into the blockchain movement by launching its NFT marketplace. The NFT marketplace just went live on ImmutableX after being in public beta since July. In August, news broke that the NFT market was down and pundits were concerned about whether the venture would be profitable or just another distraction.

Video game sales may drop

With so many people at home due to pandemic-related restrictions and stimulus money piling into bank accounts, there was a surge in demand for video games a couple of years ago. However, a recent report from the NPD Group states that video game spending fell by 13% in the second quarter of 2022. While consumer spending on video games grew by 29% in 2020 and then rose by another 8% in 2021, the research firm believes that this figure will decrease by about 9% in 2022 due to problems with supply chains and lack of major hits in the field of video games. Consumers’ struggle with rising inflation will not help the situation.

GameStop is also known as a leader in buying and selling video games, but there is uncertainty about the future of this business as the world continues to shift to digital downloads.

This brings us to the most important question…

Is it worth investing in GameStop?

In a recent article, we identified that investing in GameStop is risky as the company needs to take a number of significant steps to change its business. GameStop lost $400 million from April 2021 to April 2022, which for some reason didn’t bother retail investors looking to pump up the stock with memorial stock.

We do not believe that now is the right time to invest in such a speculative asset, as there are fears that higher interest rates could send us into a recession. The stock market sell-off in 2022 has led to multiple market turmoil that has affected even companies with strong financial performance.

Many analysts also pointed to GameStop’s stock being overvalued at a price-to-sales ratio of 1.4, as the company is technically still operating in what many consider a dying industry, physical sales.

What’s next for memes?

Stock memes are changing the investment landscape as financial results seem inconsequential to stock prices. Some analysts are hoping for stricter SEC rules, but completely shutting down trading in the stock market is difficult due to suspicions of rising meme stocks. The Securities and Exchange Commission made it clear that they are not fans of meme stocks when they recently released a series of videos in which they take pictures of meme stocks, crypto brokers and margin trading. The disclaimer warns young investors against playing with their financial future.

While the SEC is working to educate investors, it’s hard to see what rules could be implemented anytime soon. The SEC hinted at a change in the order payment system. These changes will force market makers to compete with retail investors to execute trades in an attempt to improve competition. The rules also ensure that market makers must share data on the fees firms earn as well as the timing of trades. Robinhood and other organizations opposed to these changes have already spoken out. We are still waiting for more information on these proposed rules.

Without stimulus money and worries about a looming recession, there can be no massive meme rallies in the near future.

How should you invest?

While it’s tempting to invest in a company like GameStop, it’s important to remember that investing should not be viewed as gambling. You may see that your social media timelines are filled with news about how stocks are rising despite adverse market conditions, but this does not mean that you should follow the trend.

If you don’t know which companies to invest in, you can always take the guesswork out of investing with Q.ai’s investment kit. To learn more, check out the Q.ai Short Squeeze Kit to invest in this unique stock category. The Short Squeeze Kit collects historical and technical financial information on thousands of US stocks, including related sentiment information.

GameStop needs to make some significant business improvements in order to deliver better financial results going forward. The company will release its third quarter report in December, so we’ll take a look at how the various revenue streams perform as GameStop continues to struggle. All things considered, it’s impossible to say what kind of meme rally we might see at any random moment in the near future, as there have been random bursts of activity in GME stock since early 2021. The meme stock rally is unrelated to the company’s financial performance, so we’ll be keeping a close eye on this stock.

Q.ai takes the guesswork out of investing.

Our artificial intelligence scours the markets for the best investments for all possible risk tolerances and economic situations.

Download Q.ai today to access AI-powered investment strategies.

Written by khirou

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