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Redditors Aren’t Listening but GameStop Stock Is a Certain Loser in 2022

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Reddit's army of retail traders will always support GameStop, but if you look at GME stock objectively you'll see the...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

I’ll be frank here. I’m pretty surprised that GameStop (NYSE:GME) stock managed to hold on to at least a portion of its gains in 2021. GME stock opened the year at $19 a share; today, it’s at $154.

Photo of the Gamestop (GME) logo On a Mobile Phone.
Source: Shutterstock / mundissima

Much of that is due to GameStop’s huge, loyal following on Reddit’s r/WallStreetBets. That loyal army bought hard into the Q1 narrative that a short squeeze was in the works, and GME stock was well on its way to $1,000 per share, or more.

To the moon, as they say.

GameStop made it all the way to $483 in early January, and is still up more than 700% on the year at its current price. Every time GME stock begins to fall, the r/WallStreetBets retail soldiers step in to buy the dip and add to their holdings.

These columns for InvestorPlace are designed to provide investing advice. But if you’re part of the r/WallStreetBets GameStop army, I already know that you aren’t reading. There’s nothing I can write to dissuade you from buying GME stock. I can’t convince you that you’re risking your portfolios and hard-earned money.

If you already own GameStop shares, you’re drinking the Kool-Aid. You’ve bought into the fantasy that GME stock is where you can stick it to the man, put the screws to Wall Street and make a fortune at the same time. And the only investment advice you’re going to listen to is from your r/WallStreetBets community.

That’s fine.

But if you don’t own GME stock and you’re wondering if you should get on board and try to capture some of that January 2020 magic, then this column is for you.

GameStop stock is a loser. There’s no other objective way to look at it. Stay away.

GME Stock at a Glance

GameStop stock really took off on Jan. 11, 2021. The company had a bad third-quarter 2020 earnings report, so it announced three new members for its board of directors on Jan. 11. All of them were executives from the online pet supply company Chewy (NYSE:CHWY), including co-founder Ryan Cohen.

Reddit traders identified hedge funds like Melvin Capital and Citron Research that had huge, short positions in GME stock. So, they began buying shares themselves to trigger a short squeeze. They bet that they could drive up the share price so much that hedge funds would lose big when they tried to close their short positions.

And it worked… to an extent. Some hedge funds did take big losses. But GME stock never made it to $1,000 per share, and the squeeze was short-lived, at best.

Ten months later, a report from the Securities & Exchange Commission confirmed that the jump in GME stock was largely because the retail investors were buying heavily, not that short sellers were racing to cover their positions.

Either way, GameStop was able to use its improved financial position to pay off its debt. So that’s something.

Still a Mystery to Analysts

But now we’re rolling into 2022, and the Reddit rally of GME stock is far in the rearview mirror. GameStop is still a company that relies on people to come into brick-and-mortar stores and buy video games.

The problem is that it’s just as cheap — and easier — to simply download those games onto a console. Chewey’s Cohen is firmly in charge of GameStop now, but its still unclear how the company will turn around its obviously outdated business model.

My colleague Alex Sirois described it well last week:

The fact is that Cohen’s digital transformation plans for reinvigorating GameStop haven’t come to much. What investors are left with is a company that is forecast to contract in 2022. Consensus expectations are that GameStop will record approximately $6 billion in revenue this year, but a slightly smaller $5.78 billion in 2022.

Baird analyst Colin Sebastian has a similar take. He says that “many details remain a mystery” when it comes to Cohen’s plans to turn GameStop into something that’s more of a technology company that could compete with Amazon (NASDAQ:AMZN) and then create a digital platform.

Wedbush analyst Michael Pachter is also bearish, shaving $5 off his price target to $45.

The Bottom Line

In 2019 GameStop had $8.29 billion in revenue. That fell to $6 billion this year and its projected to drop to $5.78 billion in 2022. That’s not a winning formula.

Reddit retail traders are going to continue to buy GME stock. They’ll jump on every dip. They’ll add to their positions. And they’ll encourage each other to keep holding and ride that rocket to the moon.

It’s just a fantasy and the quicker you recognize that, the sooner you’ll be able to make good investing decisions. The Reddit traders can’t be reached on this topic and I won’t try to persuade them. Just as I wouldn’t try to engage someone who thought the 2020 presidential election was stolen, or maintains that Covid-19 is fake. You can’t argue with crazy.

But if you’re willing to take a closer look at GME stock, you’ll see a stock that is sorely overvalued and has little to justify its now-ridiculous valuation.

I loved GameStop back in the day. But as an investment, GME stock is just a wreck to avoid.

On the date of publication, Patrick Sanders 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.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.

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The post Redditors Aren’t Listening but GameStop Stock Is a Certain Loser in 2022 appeared first on InvestorPlace.