With the Meme Trade Unwinding, GameStop Shows There is No There There

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David Moadel

Thu, Jan 27, 2022, 4:00 AM 4 min read

The problem with that fantasy is that it’s not likely to turn into a reality. The meme-stock trading is unraveling quickly, partially due to U.S. Federal Reserve’s less accommodative outlook, but also because asset prices must eventually reflect the underlying company’s fundamentals. In short, there is no there there.

Or, as Benjamin Graham and Warren Buffett have both put it, the stock market is a voting machine in the short term but is a weighing machine in the long term. In early 2022, it seems, Wall Street is weighing against GME stock.

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With that, perhaps it’s time to move on from the meme fantasy stage and get back to fundamentals. After seeing what’s under the hood, or inside the stores, some prospective investors might choose to avoid GameStop entirely.

A Closer Look at GME Stock

Anyone who’s in need of a reality check, should consider the math when it comes to GME stock. A year ago, the Reddit rally propelled the GameStop share price from $17 to $383. That represents a 2,150% gain, believe it or not.

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Fast-forward to January 2022, and some traders might envision a sequel to that epic run-up. Does the math support this, though?

Not really. Sure, GME stock came down from $156 to $100 in January. Even at $100, however, a 2,150% gain would require the share price to exceed $2,000.

There are a handful of $2,000+ stocks out there, but they tend to represent bigger companies than GameStop — and profitable businesses, at that.

And when it comes to profitability, GameStop doesn’t make the cut. Again, we can use math to construct the argument.

Breaking the Bank

In the company’s most recently released quarterly earnings report, GameStop boasted about its third-quarter 2021 net sales of $1.297 billion. Admittedly, that’s a decent improvement over the $1.005 billion from the prior year’s third quarter.

Still, we shouldn’t just consider the top-line results. It’s important to get into the habit of checking 10-Q filings, as you’ll get a fuller view of the good, the bad and the downright ugly fiscal stats.

Despite the aforementioned improvement in revenues, GameStop’s 10-Q shows incurred a $105.4 million net earnings loss during 2021’s third quarter.

Moreover, the company is clearly moving in the wrong direction when it comes to net earnings. During 2020’s third quarter, GameStop sustained a loss of $18.8 million, which is worrisome but not nearly as bad as the most recent result.

No Bull from This CEO

The company, in the same 10-Q filing, asserts that it is “exploring opportunities in blockchain, NFT, and Web 3.0 technology.”

There haven’t been any recent updates on this, so the shareholders should hope that GameStop’s foray into lucrative new technologies happens sooner rather than later.

Otherwise, the supposed blockchain and NFT exploration would just be talk with no action. And speaking of that, one online broker’s executive is suggesting that GameStop’s most loyal supporters are all talk.

“If you see the prices now [for GameStop] — that tells me that diamond hands or apes, I think it’s a lot of talk,” Webull CEO Anthony Denier declared recently.

He undoubtedly knows a thing or two about stock-price drivers, as Webull is very popular and successful app-based broker.

As GME stock sinks toward its pre-Reddit-run price, Denier dares to say what some commentators are likely afraid to.

“There is a very vocal minority I think of investors that are involved in this GameStop phenomenon,” he asserted.

The Bottom Line

If what the Webull CEO is saying is true, then investors shouldn’t count on social-media traders to keep GME stock afloat.

From here on out, it’s all about the weighing machine as fundamentals will matter again. That’s a problem, though, as GameStop is fundamentally flawed.

Hence, it’s perfectly fine to just avoid GME stock altogether. In 2022, it seems, trying to game GameStop just isn’t worth the risk.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.