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Is GameStop stock still worth considering as a buying option?

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GameStop’s stock is once again making headlines with a powerful surge, driven by the return of “Roaring Kitty” to social media and his significant investment in the company. This surge created a frenzy of activity, allowing the management to raise billions through equity sales and solidify the company’s position. 

Nevertheless, the video game retailer’s valuation continues to defy traditional fundamentals, making it a challenging and risky play for both long and short positions. The ongoing volatility adds an extra layer of intrigue, putting pressure on short sellers and turning GameStop into a speculative hot topic once again.

The return of “Roaring Kitty”

Ever since 2020, GameStop has been making waves as a meme stock, and the man behind this phenomenon is none other than Keith Gill, also known as “Roaring Kitty.” 

Gill, a typical trader, became well-known between 2020 and 2021 for sharing his unique investment concepts regarding GameStop stock on his YouTube channel. His online presence influenced hundreds of thousands of individual investors to support the company, causing significant short squeezes and triggering the “meme frenzy.” 

This phenomenon not only affected GME but also led to sudden increases in the trading performance of several other heavily shorted stocks as individual investors forced out short sellers.

After facing legal action, Keith Gill stood in front of a jury and declared his innocence in the alleged manipulation of GameStop’s stock. He was eventually cleared of any wrongdoing but has kept a low profile on social media since 2021. During this time, GameStop’s stock took a significant downturn, dropping by about 85% until earlier this year.

In May of this year, Roaring Kitty made a comeback on social media. With the post of memes on X, he ignited the enthusiasm of retail investors like he did back in 2021, causing GameStop’s shares to skyrocket once again. 

Keith Gill’s return wasn’t just a comeback – he was doubling down on GameStop stock, and he wasn’t holding back. Roaring Kitty revealed his holdings of over five million GameStop shares, 120,000 call options, and a whopping $29 million in cash, totaling approximately $210 million in assets. He later exercised his call options, increasing his stake to about nine million shares, while keeping around $6 million in cash.

GameStop low on HP

In recent years, GameStop has been at the center of a lot of attention, but its core business hasn’t shifted much. The company has been struggling with declining sales, mostly due to the rise of digital gaming and the shift towards e-commerce. Despite efforts to turn things around, there have been ongoing challenges. 

During Fiscal 2023, the company experienced a decrease in revenue, a trend that has continued into Fiscal 2024 with a notable 28.7% drop reported in Q1. This downturn reflects broader economic challenges affecting consumer spending on non-essential items. In Q1, the adjusted net loss totaled $36.7 million, equivalent to $0.12 per share.

However, things took an interesting turn when Ryan Cohen, the company’s largest shareholder, took charge as Chairman of the board and later as CEO. His leadership brought a new sense of ownership and direction to the company.

Financials leveling up

Although GameStop still faces demand issues, the worries about potential financial difficulties seem to have been put to rest. Thanks to management’s decision, heavily influenced by Cohen, to capitalize on the soaring demand for the stock, they successfully raised about $1.67 billion through a massive equity offering in 2021.

After the cash infusion, the company not only managed to pay off all its debts but also bolstered its cash reserves to $1 billion. Instead of using this financial power to revitalize its core business, GameStop opted for a cost-cutting strategy, which surprisingly led to its first profitable year in a while.

In May, the company seized the opportunity presented by its rising share price, securing a notable $933 million through the sale of 45 million shares. However, this was only the outset of their financial maneuvers.

With another significant surge in June, GameStop recently completed an “at-the-market” equity offering raising an additional $2.1 billion from the sale of 75 million shares. Putting the figures into perspective, the company currently holds an impressive $4 billion in cash reserves and carries virtually no debt.

Nevertheless, while this move enhanced the company’s financial flexibility, it also led to a decline in the stock price due to the issuance of shares at a discounted rate.

What’s the next chapter for GameStop?

GameStop’s managing team intends to use the funds raised from the stock offering for general corporate purposes, including possible investments and acquisitions. 

In the third quarter of last year, the company announced a modification to its investment policy. Formerly limited to fixed-income securities, it now permits investments in various types of equities, under the guidance of Ryan Cohen and selected board members.

While specific future plans from management remain limited, there is a strong indication that GameStop aims to expand beyond traditional retail outlets. This potential move could involve investments in other businesses, potentially reshaping the company into a diversified holding entity.

Nevertheless, this strategy, though somewhat vague and carrying significant risks in execution, embodies GameStop’s current investment philosophy—a vote of confidence in the capabilities of its leadership team.

Should you buy GameStop stock?

Since turning into a meme stock, GameStop’s has shifted away from a conventional investment alternative to being a bet driven by impulse and not underlying fundamentals. It is now viewed in the market not as a typical investment opportunity but rather as a speculative “momentum play.”

The sole analyst covering GameStop in its meme stock phase is Michael Pachter from Wedbush. He highlights the exceptionally high volatility and attributes recent equity sales by GameStop’s management to its significant overvaluation. Despite a recently fortified balance sheet and active management, there is no evident strategy for a fundamental turnaround. The appeal remains purely based on momentum.

Trading based solely on momentum carries risks due to its detachment from fundamental metrics, making both long and short positions speculative endeavors. Pachter, who has maintained a pessimistic view on GME for an extended period, continues to recommend selling the stock with a target price of $11, indicating a potential downside of 61.7%. 

(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)

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