What’s Going On With The Latest GameStop Rally?

Key Takeaways

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

GME stock was once again in the news when trading was all over the place last Monday. GameStop became known for the meme stock mania back in January 2021, and it looks like these meme stock rallies are going to be popping up on occasion still. Even though shares of GME soared 688% in 2021 due to coordination among retail investors and certain high profile whales, the company continues to struggle financially.

What’s Happening With GME Stock?

GME stock again saw a spike on October 31 when the trading volume went through the roof. During the first trading hour of Halloween, 12,696,871 shares changed hands. The swing that day marked the largest bout of intraday reversal since late May. Within 10 minutes, trading of GME Stock had to be stopped twice.

GME shares rose 24% at the peak during the day only to finish about 0.5% higher than the opening price at $28.31. GME stock then closed on November 3 at $26.21.

We recently looked at the meme stock rallies to try to make sense of what was happening with these companies as retail investors pumped up the share prices. Many experts traditionally rely on “smart money,” which often involves institutional investors, funds, and professionals that invest in companies based on stock fundamentals.

There appears to be a disconnect these days as retail investors invest in stocks with poor financial results. Events like “meme mania” are changing the landscape of investing as retail investors rally behind stocks without considering a company’s actual financial performance.

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

How Are the Financials for GameStop right now?

GameStop last released its financial results on September 7 when they shared how the company performed for the period ending on July 31, 2022. These are some of the notable highlights from the financials of GameStop for the second quarter:

• Earnings per share were negative $0.35.
• Revenue was reported at $1.14 billion, short of analysts’ expectations of $1.27 billion and down 4% year over year.
• GameStop had a negative return on equity of 33.28% and a negative net margin of 8.57%
• Inventory shot up to $734.8 million. This worried many investors even though the company stated that they were preparing for possible supply chain disruptions.
• Sales from collectibles (a growing revenue stream for the company) were at $223.2 million.

With net sales dropping 4% year over year due to struggling software and hardware sales, the operation losses went up 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 healthy. However, these lackluster financials seem to have no bearing on the meme stock-buying frenzy.

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What’s Next for GameStop?

The company’s stock is down about 30% for the year. Investors have been hoping that GameStop could turn their business around. Here are some of the recent changes that Gamestop has made.

GameStop shuts down physical locations

To improve profit margins, the company closed down several physical locations. GameStop was able to control some of the losses by dropping the brick-and-mortar location count from 7,276 at the end of the fiscal year 2017 to 4,573 stores at the end of fiscal year 2021. The company is also trying to transition to online sales, where they also offer collectibles and more.

Diversified revenue streams

The company also focused on expanding its e-commerce platform to sell more collectibles and accessories. A recent story on Reddit highlighted how GameStop employees were laughing at the idea that the stores were now selling what they categorized as “random junk,” with items such as a lemon-powered clock and an algebra tile set being the highlights. Some customers on social media complained that they preferred it when GameStop focused on video games. We will have to see how the collectibles revenue sector does for the company.

GameStop NFT Marketplace

GameStop has been working on diversifying its revenue streams by latching on to the blockchain movement by launching its NFT marketplace. The NFT marketplace just went live on ImmutableX after operating as a public beta since July. In August, news came out that the NFT marketplace wasn’t performing well, and experts were concerned about whether this venture would be profitable or just another distraction.

Video game sales could decline

With so many people at home due to pandemic-related lockdowns and stimulus money hitting bank accounts, there was an increased demand for video games a couple of years ago. However, in a recent report from the NPD Group, it looks like video game spending dropped by 13% in the second quarter of 2022. While consumer spending on video games increased 29% in 2020 and then grew an additional 8% in 2021, this research firm believes that figure will decline by about 9% in 2022 due to supply chain issues and a lack of big hits in the video game space. Consumers’ struggles with soaring inflation won’t help the situation.

GameStop has also been known as the leader in buying and selling video games, but there’s uncertainty regarding the future of that business as the world continues to go to digital downloads.

This leads us to the most critical question…

Should You Invest in GameStop?

We determined in a recent article that investing in GameStop is risky because the company needs to make some significant moves to turn its business around. GameStop lost $400 million from April 2021 to April 2022, which for some reason hasn’t been a concern for retail investors looking to pump up the stock with meme rallies.

We don’t believe that now is the time to invest in such a speculative asset as there are concerns over how interest rate hikes could tip us into a recession. The stock market sell-offs of 2022 have led to plenty of market turbulence that has even impacted companies with strong financials.

Many analysts have also brought up how GameStop stock is overvalued with a price-to-sales ratio of 1.4 as the company still technically operates in what many consider a dying industry —brick-and-mortar sales.

What’s Next For Meme Stocks?

Meme stocks are changing the investing landscape as financial results seem irrelevant to stock prices. Some analysts are hoping for stricter SEC regulations, but it’s difficult to completely halt stock market trading due to suspicions of meme stock rallies. The SEC has made it clear that they’re not fans of meme stocks when they recently released a series of videos where they take shots at meme stocks, crypto bros, and margin trading. The disclaimer warns young investors about playing games with their financial futures.

Even though the SEC is working on educating investors, it’s challenging to know what kind of regulations could be implemented shortly. The SEC has hinted at a change to the payment-for-order flow system. These changes would force market makers to compete for trade execution from retail investors in an attempt to improve competition. The rules would also ensure that market makers must share data around fees that the firms earn along with the timing of trades. There has already been pushback from Robinhood and others who aren’t in agreement with these changes. We’re still awaiting further information on these proposed regulations.

Without stimulus money and with concerns over a recession brewing, there may not be any massive meme stock rallies in the near future.

How Should You Be Investing?

While it’s tempting to invest in a company like GameStop, it’s important to remember that investing should not be treated like gambling. You may see your social media timelines flooded with news about how stocks are going up despite unfavorable market conditions, but it doesn’t mean you have to jump on the trend.

If you’re unsure of which companies to invest in, you can always take the guesswork out of investing with an Investment Kit from Q.ai. 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 U.S. equities, including relevant sentiment information.

GameStop has to make some major improvements to the business in order to show better financial results moving forward. The company will be reporting for the third quarter in December, so we’ll see how the different revenue streams are performing as GameStop continues to struggle. With all of that said, there’s no telling what kind of meme rally we could see occur at any random time in the near future since GME stock has seen random bursts of activity since early 2021. Meme stock rallies are disconnected from the financial results of the company, so we’ll be watching this stock closely.

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