Shares traded all the way up to $483 per share during the rally, but then began to decline dramatically throughout the year. This shouldn’t have been surprising at all considering the fundamentals were completely detached from reality, the stock was merely trading in the hope of making short-sellers lose money by buying the stock back for higher.
Surprisingly, retail investors succeeded, and it’s marked a forever noticeable event in the stock chart. Even despite a decline of nearly 70% since all-time highs, the stock gained 687.63% year-over-year.
Now that it’s 2022, investing environments have dramatically changed. In fact, investors are less willing to throw their capital into speculative bets, but rather invest in high-quality businesses, as seen from the massive decline in growth-related stocks over the past few months.
GameStop for many years had deteriorating fundamentals which included the harsh declines in revenue and dwindling of earnings. Although, something recently changed.
Oddly, in the third quarter of 2021, GameStop reported an increase in revenues on a year-over-year basis, resulting in almost $1.3 billion. This growth represented an increase of 29%. While the third quarter may look impressive on a year-over-year structure, the business continues to deteriorate, as earnings fell 460% in the same quarter.
The GME stock price-to-sales ratio is low, at 1.92. This might be shocking low to some investors, but retailers, especially ones who face bankruptcy risk, trade at far lower multiples than the average retailer. If the business were to fundamentally improve, then it may look more attractive. For now, it’s not great.
More individuals are purchasing video games and merchandise through online e-commerce platforms than ever. Steam, the online video game distributor, is one of the most notable competitors to GameStop since over 120 million users actively use the service every month to play and purchase their favorite game titles.
Steam is a private company, but it’s sure altered the history of GME stock and the company as a whole and set a precedent for what consumers are looking for.
Unfortunately, GameStop has a major disadvantage being a physical location as opposed to digital. If GameStop were to shift towards an online-focused distribution platform, they would still have incredible difficulty cracking into such a competitive industry. It might be the only chance they have to prevent themselves from being the next Blockbuster of the video game environment.
GME stock was one of the hardest-hit stocks in 2021 from its all-time highs. This comes as no surprise since the fundamentals were detached from reality.
On top of the terrible fundamentals, immense competition, and the possibility of bankruptcy, GameStop also faces yet another threat. Selling pressure.
For many stocks, selling pressure tends to slow when the stock has fallen past what the business is fundamentally worth. Since this can’t be said for GME stock, it’s extremely likely things will continue to get worse.
In an environment where the Federal Reserve could be raising interest rates, speculative higher-risk stocks such as GME face a disproportionate amount of risk that could almost certainly lead to the loss of capital.
Plus, shorting pressure will likely continue as the stock tumbles lower. There are far too many reasons to steer clear.
From what investors can see, there are not many catalysts that could push GME stock higher. In fact, reasons are abundant on why it could continue going lower for years to come as it faces the legitimate risk of bankruptcy as they fail to innovate in a competitive industry.
Steam and other online video game distributors have already absorbed so much value off of the table, making GameStop struggle to keep up with the times. Consumers would rather buy something from the comfort of their own homes instead of driving out to the nearest GameStop location.
There are far better bets out there to make on businesses that are growing in their respective industries. Even some video game companies are making their own distribution platforms, selling direct-to-consumer such as Electronic Arts (EA) and Take-Two Interactive (TTWO).
This exponential curve of consumers buying digital products and services online will undoubtedly continue, so it’s unnecessary to take the risk on GME.
Furthermore, it may be best for investors to steer clear and instead focus on stocks that are fundamentally stable within a growing industry as it could increase their chances of overall success over the short and long-term future.