GME Stock Price Rises 27% – Time to Buy GameStop Stock?
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GameStop (GME) stock rose over 27% yesterday and took its YTD gains to 1,120%. Other meme stocks have also risen sharply amid short squeeze. What’s the forecast for GME stock and should you buy it now?
Both GME and AMC Entertainment have been the poster child of meme stocks and both these stocks rose over 20% yesterday. Both these stocks are popular among retail traders. AMC is now majority held by retail traders as institutional investors exited after the sharp rally.
GameStop Stock recent developments
There hasn’t been any recent news from GameStop. In June, the company had announced that it would rebrand EB Games in Canada under the GameStop brand. The stock came under pressure in July on reports that Netflix is getting into the gaming industry. July wasn’t a good month for meme stocks and penny names. However, August has been a different ballgame.
We’ll next hear from GME when the company releases its fiscal second earnings next month. That said, the company has avoided analysts’ questions for the last two earnings call. The company might do so this time around as well and look for a direct connection with retail traders through streaming its earnings call.
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GME Stock Price earnings estimates
Analysts expect GME to report revenues of $1.12 billion which would mean a YoY rise of 19.2%. The company’s revenues had increased 25% in the previous quarter also. It was the first time after a gap of three years when the gaming retailer had reported a yearly rise in revenues. That said, the revenue rise is coming from a lower base as the company’s revenues had tumbled in 2020 amid the lockdowns. The company’s revenue in the quarter is expected to be lower than the corresponding period in 2019.
Under Ryan Cohen’s leadership, GameStop has been working on a transformation plan and has taken several decisions including an overhaul of the top management. It has hired several executives from tech companies like Amazon. That said, while some believe that the management changes are a step in the right direction, others have scoffed at the idea and don’t see GME becoming the Amazon of gaming by hiring ex-Amazon employees.
Ryan Cohen
Cohen sees the transformation as a long haul. “We are trying to do something that nobody in the retail space has ever done, but we believe we are putting the right pieces in place and we have clear goals: delighting customers, and driving shareholder value for the long term,” he said to shareholders. He added, “We have a lot of work in front of us and it will take time.”
GameStop Stock Forecast
Only four analysts are covering GME stock. While two rate them as a sell, two others have a hold rating. None of the analysts have a buy rating on GameStop which is not uncommon for meme stocks. Wall Street analysts have been very pessimistic on meme names like GME and AMC.
That said, Jefferies surprised everyone by assigning a $190 target price on GME stock. The brokerage’s target price is an outlier though and the median target price is $37.50 which is a discount of 82% over current prices.
Analyst action
In June, Baird had suspended its rating on GME stock amid uncertainty over the business plans. “We are temporarily suspending our rating and price target until the company more clearly articulates new management’s business strategy, which should also allow investors to better assess the company’s intrinsic value and prospects for future free cash flow generation.”
GameStop has made several announcements and said that it plans to increase its target market by 5x. However, there hasn’t been much information on the business plans. The management’s refusal to take analyst questions hasn’t helped matters either.
That said, GME has been progressing well on the e-commerce plans and online sales as a percentage of its total sales has been gradually rising. The company has been trying to pivot towards online sales and has been closing down several stores as part of the process.
Like fellow meme names, GameStop has also capitalized on the surge in its stock and raised cash by selling shares multiple times. AMC has also been raising cash. It would have raised more cash but the plans were thwarted by retail shareholders.
GameStop Stock valuation
Valuing GameStop stock has been a conundrum. The stock trades at an NTM (next-12 months) EV-to-sales multiple of 2.8x as compared to a ten-year average of 0.43x. In fact, before the Reddit mania began, GME hasn’t traded above 1x its forward sales over the last decade. The last time its NTM EV-to-sales rose above 1x was way back in 2008.
To be sure, the digital transformation and the turnaround efforts have made GameStop a different company. However, it’s still very much a gaming retailer. The industry has been facing a stiff battle as gaming moves online. The bumper listings of companies like Roblox and Unity Software were a testimony to the growing popularity of online gaming.
GME Stock technical analysis
GME stock has crossed above the 50-day and 100-day SMA (simple moving average) which is a bullish indicator. However, it is getting overbought now as the 14-day RSI (relative strength index) has moved above 70.
Overall, GameStop is a risky and overvalued bet on the turnaround under Cohen. While the stock may go up amid the short squeeze, the fundamentals simply don’t justify the $15 billion market cap for the gaming retailer. But then, its a good stock for day trading considering the massive intraday volatility.
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