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This game is rigged against you
Well, here we go again. The rigged game of meme stock trading is back in vogue, evidently. GameStop (NYSE:GME) stockbrokers deserve the credit or perhaps the blame for this. I’m not going to win any popularity contests for this, but I’m bearish on GME stock and hope this mania phase ends badly, just like it did after the 2021 hype cycle (see the graph below).
If anyone cares more, GameStop sells physical copies of video games and, to a lesser extent, digital copies of games. Generally speaking, today’s gamers download or stream their video games directly rather than purchasing them through GameStop.
The problem is that financial traders have notoriously short attention spans – but you don’t need to fall into that trap. I sincerely hope this message reaches you before you commit your hard-earned capital to GameStop stock, only to likely end up regretting it later.
GameStop: the unusual reason for the rally
As I’ll describe in a few moments, Wall Street analysts barely cover GameStop (and the only Wedbush analyst who covers GameStop is definitely not bullish). This is because experienced investors do not take the company very seriously. However, GameStop stock — I mean the stock, not the company itself — has attracted a lot of attention in 2021. Fast forward to May 13, 2024, and the original meme stock from the 2020s is in the spotlight once again .
As covered by TipRanks contributor Shrilekha Pethe, as well as Bloomberg and others, GME stock expanded unexpectedly on Monday, eventually doubling in price around 10 a.m. Eastern Time. Thanks to Pethe’s reporting, I quickly discovered that there was no catalyst requested by the company on May 13, such as an earnings report or an announcement from GameStop CEO Ryan Cohen.
Instead, the event that excited meme stock traders was a post by “Roaring Kitty,” or @TheRoaringKitty, on social media platform X. Previously, prolific Reddit user and meme stock guru, “Roaring Kitty” posted to X on Monday, and this was her first post to X or Reddit since the height of speculative fervor in the stock market in 2021.
Judging by the post on Is he suggesting that he is now sitting up and paying attention to something after a long absence?
GameStop: It’s all FOMO and YOLO
For what it’s worth, there’s no denying that “Roaring Kitty” has some influence in the online trading community. Judging by Monday impressive rise in GME sharesIt’s clear that meme stock traders haven’t lost their sense of FOMO (fear of missing out) and YOLO (you only live once).
The story continues
Financial Insights President Peter Atwater succinctly summarized the still-considerable influence of “Roaring Kitty” and the implications of the meme stock’s apparent revival on Monday.
“The fact that he’s able to generate a crowd says that the crowd is back to feeling FOMO and YOLO in a huge way… When people dive into things that are of pure speculative value, their confidence is extremely high and that’s one of the ways that it speaks out,” Atwater explained.
The key phrase here is “pure speculative value”. With the TipRanks tools at my disposal, I can immediately discern that GameStop is not on solid ground when it comes to the company’s fundamentals.
GameStop’s financial page is particularly helpful here. It turns out that the company has negative free cash flow (FCF) and about $600 million in total debt.
Furthermore, in GameStop Earnings Pagefound that Wall Street’s consensus forecast calls for the company to go from an adjusted profit in the fourth quarter of 2023 to an adjusted loss in the first quarter of 2024. Only time will tell whether GameStop actually lost money in the first quarter, as if expects the company to release its earnings report on June 5.
However, avid meme stock traders have already driven up GameStop’s stock price ahead of the earnings report. Now, GameStop has the unenviable burden of having to justify its sky-high share price – just like in 2021, and that story didn’t end well in 2022, 2023 and early 2024.
To end this cautionary note, I will turn to the wisdom and experience of Giacomo Pierantoni, head of data at Vanda Research. He warned: “These increases in retail activity served as contrarian signals, prompting institutional investors to quickly sell shares following these retail investor-driven rallies.” So would you rather be on the retail side or the large-scale whales?
Is GameStop Stock a Buy, According to Analysts?
On TipRanks, GME appears as a Moderate Sell based on a Sell rating assigned over the past three months. GameStop stock price target is $5.60implying a negative potential of 81.6%.
Conclusion: Should You Consider GameStop Stock?
The strange rise in GameStop shares could be a “contrarian signal,” to borrow a phrase from Pierantoni. However, I don’t recommend trying to mitigate today’s move and short the stock. That’s just asking for trouble.
On the other hand, serious investors should think long and hard about GameStop’s fundamentals. The company has to deal with weak consumer spending and stiff competition. Short-term traders can ignore the warning signs, but I believe they shouldn’t. In short, the game is rigged against investors chasing GME shares in hopes of long-term gains, and I’m definitely not considering buying any shares today.