Why Did Gamestop Soar?

When meme stocks were all the rage in 2020-21, Gamestop (NSYE: GME) took center stage.

The ailing retail video game shop was popular with investors who were distressed by the excessive shorting GME faced from hedge funds.

Keith Gill, who went by the pseudonym RoaringKitty led retail investors on the popular Reddit forum r/wallstreetbets to drive the GME share price up almost 135% in one day in January 2021, dealing billions of dollars in damage to short-selling hedge funds like the now-defunct Melvin Capital.

Since the meme stock glory days, GME has gradually returned to earth. The stock had fallen around 87% from its 2021 high as the company has struggled to consistently drive revenue. But a recent X post by RoaringKitty has sparked interest in the stock again, and GME was up as much as 110% on the news.

But will Gamestop keep going up?

Why Did Gamestop Stock Go Up So Much?

When Keith Gill posted on X for the first time in years, followers poured into Gamestop stock driving the share price substantially higher in just a few days.

Gill had been inactive on social media for years, but though his X post was certainly welcome to fans, it didn’t give other investors much to go on. The post was simply a picture of a video gamer leaning forward in his chair.

The soaring share price that followed didn’t mimic an equivalent increase in the fundamentals. For the 4th quarter of FY23 earnings release revenue was down by 19.44% year-over-year to $1.79 billion, underperforming the top line forecast of $2.05 billion by 12.49%. Revenue for full-year 2023 was $5.27 billion compared to 2022’s 5.93 billion.

Net income of $63.1 million was a marked improvement year-over-year, up 30.9% from $48.2 million. Still, diluted earnings per share worked out to $0.22, which didn’t match up to analysts’ $0.29 EPS consensus for the quarter.

The company didn’t hold a conference call about the earnings release and declined to elaborate on the reasons for the misses. The March earnings report did little to halt GME’s continual downward slide through the first months of 2024.

Will Gamestop Stock Keep Going Up?

That decline was halted in a single social media post, but there are already signs that Gamestop’s explosion might just be a flash in the pan. Shortly after the stock surged on the RoaringKitty news, Gamestop announced it would sell 45 million common shares in an at-the-market offering.

Adding to that unpopular move, GameStop separately announced that estimates for first-quarter FY24 net sales would land between $872 million and $892 million, a substantial drop from $1.24 billion in net sales from the same quarter of 2023. It’s also lower than the $1 billion in sales analysts expected.

Gamestop is also expected to veer into net loss territory for the 1st quarter, with a net loss forecasted in the $27 million to $37 million range, still representing an improvement over the $50.5 million net loss in the same quarter of 2023, but it still disappointed analysts.

The company has already announced that it will be laying off employees and cutting expenses in an effort to deal with increased competition from e-commerce game sellers. That news, coupled with the reduced guidance and share-selloff announcement has dealt the meme-stock revival a blow.

Since GME peaked at $64.20 on the RoaringKitty post, the stock has sold off sharply. GME has now dropped 65.7% in a matter of days.

How Do Analysts Rate Gamestop?

While retail investors might be nostalgic for meme stocks, Wall Street doesn’t share the same enthusiasm. Only two Wall Street analysts have chosen to rate GME, and both believe it’s a Sell.

The highest forecast is $15.50 per share, which translates to a 30.2% decline from where the stock currently trades. The lowest of the two forecasts has GME plummeting to $6.10 per share, a 72.5% drop. Analysts’ bearishness largely pertains to Gamestop’s struggling financials.

“They made $6 million last year and burned cash,” said Michael Pachter, a Wedbush analyst. “We expect them to lose $100 million a year going forward. It’s a race to see if they can close stores fast enough to limit losses, but they have no plan that would suggest they can grow revenues or profits, and their core business is in decline.”

Is Gamestop Stock a Buy or Sell?

Neither the stock’s heyday in 2021 nor its surge in recent days was based on Gamestop’s strong financial position. 

GME is tied to the sentiment of retail investors, and it’s unclear if such a transient reason will be strong enough to keep the stock above water for long. The immediate recent selloff would seem proof that the meme stock celebration might already be over.

Gamestock shares have a price-to-sales multiple of 2.9x after the recent run-up, and GME is still up 33.2% year-to-date. Given the company’s declining revenue, GME appears to be overvalued at this point.

There’s no denying that GME share price has a unique place in stock market history and that the retail investor movement which pushed it to the forefront will be studied for years to come.

While there is still clearly a contingent of investors who would love to see GME take off again, that cohort isn’t as large or as fervent as it was a few years ago.

Unless Gill posts something more substantial as to why investors should buy GME, the movement is likely to fizzle out. That seems all but confirmed by Gamestop’s Board of Directors given that recent share issuances seems like a ploy to capitalize on this new moment in the sun to raise much-needed cash.

Given the declining revenues and lack of catalysts to solve the company’s long-running issues, it looks like the neo-meme-stock frenzy could be over as quickly as it began.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.