The US retailer Gamestop (NYSE: GME) has had a roller-coaster year, including its brief time as a headline meme stock. Incredibly, the Gamestop share price is 1,733% higher than it was a year ago, at the time of writing today.
In the past three weeks or so, the shares have moved up 23%. What’s going on?
GME: an unremarkable business but remarkable share
The GME business is a sort of HMV, whose primary focus is video games. As retailers from HMV to Borders have found, a decline in demand for physical products in a digital age can make previously successful business models struggle.
A lot of games are now sold or rented online rather than in physical format through a third party such as Gamestop. It’s worth noting, though, that the Gamestop business isn’t at the end of the road. It still has almost 5,000 stores across the US and other markets. Revenues last year topped $5bn, although the company made a loss. That was the third consecutive year of declining revenue, but clearly Gamestop remains a sizeable business. With the right strategy I think it could survive in some form for decades to come. For example, it could be a physical meeting place for collectibles fans to set itself apart from online games sellers. But as it stands, I don’t think it’s a remarkable business. It has a simple business model in a mature industry, which may also be a sunset industry.
By contrast, GME has been a remarkable share. That is not because of the business fundamentals, but instead is due to the rise and partial fall of GME as a meme stock. Now, it is rising again.
Some traders continue to play the Gamestop share price
I think the recent upwards movement in the GME share price remains tied to traders speculating on the actions of fellow traders, rather than investors assessing the company on a fundamental basis. Currently the company’s market capitalisation is over $16bn. For a loss-making video game retailer that looks excessive to me.
But the remarkable story of GME shares over the past year has made a lot of traders follow it closely. Hoping for further opportunities to get even a fraction of the profits generated by some GME trades earlier this year, I reckon a lot of the explanation for recent GME share price movements lies with traders not investors.
My next move on GME
As an investor not a trader, GME is not for me.
The share price could keep rising — but there’s clearly also a risk that it will crash. When shares get detached from the underlying fundamentals of the business, wild swings in share prices become more likely. Falls won’t necessarily reverse in future. Just because a share price crashes, it doesn’t mean it will ever rise again. Despite the recent rising GME share price, I will be giving it a wide berth.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
