ETFs
Should You Buy GameStop-Heavy ETFs on Meme Mania? – May 14, 2024
The world’s largest video game retailer Stoppage of play (GME – Free report) the stock jumped 74.4% on May 13, 2024 following the return of Keith Gill, also known as Roaring Kitty, to social media after a three-year absence. Its reappearance on the X platform reignited enthusiasm among retail investors as it kicked off the meme stock rally during the pandemic.
GME stock has approximately 6.24% exposure to YieldMax Ultra Option Income Strategy ETF (ULTY – Free report) and 3.3% exposure to Amplify Video Game Technology ETF (GAMR – Free report) . The ULTY fund jumped about 5.8% on May 13 and the GAMR fund added 1.9%.
Previous GameStop Short Story
GME shares have soared as much as 688% in 2021, thanks to meme mania. In January 2021 itself, GME shares gained over 1,600%. The increase in purchases by individual investors on online forums has long trapped short sellers, who had anticipated a decline in the stock. Faced with potentially massive losses, these investors were forced to buy the stock, driving its price even higher.
In fact, Gill gained notoriety in 2020 and 2021 as the key figure behind the GameStop short squeeze. His activities led to a hearing before the House Financial Services Committee regarding possible market manipulation.
Is 2024 imitating 2021?
Also this time, the sentiment around GME stock is bearish. GameStop has a Zacks Rank #5 (Strong Sell). GameStop reported its fourth-quarter fiscal 2023 results in March, generating lower-than-expected earnings per share and revenue. Although revenue declined year-over-year, net income compared favorably to the prior-year quarter’s reported figure. Higher inflationary pressures on consumer spending in the gaming industry led to lower demand and, as a result, weighed on the company’s bottom line.
The company’s cash position is also weak. During the 53-week period ended February 3, 2024, the company used operating cash flow of $203.7 million compared to an outflow of $108.2 million during the same period of the year last. Free cash flow during the same period was negative $238.6 million.
The year-over-year earnings growth estimate for the coming quarter is 28.57%, while the earnings growth estimate for the current year is negative 100%. The company is expected to see a 19.2% decline in revenue in the quarter ended April 2024, while the forecast sales growth for the current year is a negative 12.76%.
Valuation ratios are unfavorable for the stock. GameStop’s forward P/E ratio is 1,746 times the underlying. Retail – Consumer Electronics Industry P/E of 879.16X. GME stock price/sales is 1.01X versus 0.69X that of the underlying industry. GME’s price-to-book (P/B) ratio is 3.98X compared to the industry’s P/B of 2.56X. The price to cash flow (P/CF) ratio is 72.48X compared to the industry metric of 9.52X.
A glimmer of hope ?
Over the past four quarters, although the company’s earnings missed the Zacks Consensus Estimate in the most recently reported quarter, but beat the other three, leading to an average earnings surprise of 46.41%. The stock has a optimistic VGM (Value-Growth-Momentum) score of “A”.
Should you buy GME-Heavy ETFs?
Meme stock investing is not for everyone. Just as stocks can rise quickly, they can fall just as quickly. For example, GME’s value fell almost 70% in February 2021. In such a risky fundamental environment (as noted above), volatility around GME trading must be high.
However, that doesn’t mean GameStop can’t make further progress. Therefore, investors who do not have an appetite for risk can try investing in ETFs rich in GME. After all, ETFs significantly reduce company-specific risks.
ULTY in brief
The ULTY fund is an actively managed ETF that seeks to generate monthly income from a portfolio of covered call strategies, each on a U.S.-listed security. A covered call is an options trading strategy that offers limited return for limited risk. The fund charges 114 basis points in fees and returns 15.23% per year. Yield is another benefit for investors.
GAMR in brief
The underlying EEFund Video Game Tech Index tracks companies actively involved in the electronic gaming industry, including the entertainment, education and simulation segments. The fund charges 75 basis points in fees.
Want key ETF news sent straight to your inbox?
The free Zacks Funds Newsletter will bring you top news, analysis, and top-performing ETFs every week.