Until The Company Has A Profitable Model, GME Remains Overvalued
Approximately a year removed from the "mother of all short squeezes" (MOASS), GameStop (NYSE:GME) remains comfortably above its pre-squeeze level. As I write this, GME stock is trading at $87.05 per share and is seeing its share price surge 5% prior to its earnings report on Mar. 17.
At this point, the earnings report isn’t expected to be earth shattering. GameStop is not profitable and will not be for the foreseeable future. Nevertheless, one of the narratives that’s fueling continued interest in GME stock is the company’s turnaround plan.
This plan is a combination of transitioning to an e-commerce model as well as dabbling in areas like non-fungible tokens (NFTs) and Web 3.0 (I.e. metaverse) opportunities. This would, by necessity, means the company will be making a substantial investment in cryptocurrency.
On its face, the company’s plan seems sound enough. And the company may be able to show year-over-year revenue growth. That’s more than many newly public companies can boast. However, while many of these startups saw their stocks caught up in the meme stock movement; they’ve come crashing down far more than GME stock.
Unfortunately for the diamond hands that continue to hold GameStop stock, the stock may need to fall much further.
When Management Speaks, It’s Good to Listen
One concern with the company’s business plan is the opaqueness that the company is asking of investors. In January, The Verge described the company’s plans as such:
The company is said to be courting game developers and publishers to list NFTs on its marketplace, and hopes to ink deals with crypto companies to develop the underlying technology and help invest in games featuring NFT and blockchain tech.
That is specifically vague. However, for all the things that are unclear about the future direction of GameStop, management did make one definitive statement in its last earnings report. The company said its focus will be on the top line growth. GameStop CEO Matt Furlong said,
“Our focus on the long term, means we will continuously prioritize growth and market leadership over short-term margins.”
I’m not throwing cold water on the strategy. The company is attempting to make a challenging pivot. So it’s fair that they have to be viewed more like a startup company. But it also means that investors shouldn’t be expected to pay a premium price.
Stay Away From GME Stock Until it Gets Much Lower
At this point, the company has shown investors few tangible reasons to justify the stock’s current valuation. And so far, the company’s efforts have been met with indifference and in some cases hostility by the gamers and in-game NFT creators who don’t see the company adding value to the experience.
Yet despite that, retail investors are trying to see the value in GME stock. And that’s despite the stock being down 41% in 2021 and 58% in the last 12 months. And make no mistake, it’s retail investors who are carrying GME stock. Institutional ownership is hovering around 25% and shows no signs of increasing. Plus, the company only has about 2% insider ownership. Ideally investors would want to see more company insiders investing in its stock.
That’s a heavy bag for investors who bought into the stock on its way up. If you’re not one of those investors, I’d recommend you stay away from GME stock until it trades at a level that’s more in line with its revenue and, for now, negative earnings.