After surging higher in late May, shares in video-game retailer GameStop (NYSE:GME) are holding steady at just over $120 per share. GME stock remains seemingly unsinkable right now. With the long side holding with diamond hands, and the short-side possibly getting carried away with their big bets against it, the “meme stock saga” continues.
Yet while it may seem as if this is a story of the united long-side standing defiant against the so-called “smart money” short-sellers, as I have discussed recently, it may simply be excitement over its upcoming stock split that’s keeping it from dropping.
With more fair-weather buyers only sticking around for a post-split boost, shares could fall back once this event happens. The stock may be up more than 50% since May 24, the story here has not changed much. Still a situation with questionable upside, and big downside, staying away is your best move.
| GME | GameStop | $121.94 |
GME Stock and The Upcoming Split
Since getting the go-ahead from its investors for the split at the June 2 shareholder meeting, there’s been little update on the planned GameStop stock split. Nevertheless, regarded as one of its key short-term catalysts, it’s likely the main reason why the stock has stayed strong. All while other popular meme plays, like AMC Entertainment (NYSE:AMC) have languished in the past month.
Admittedly, a lot is still up in the air about the split. It wouldn’t be surprising if GME stock pops again, if/when more details about the split come out. It may be possible to profit by buying it now. Either by flipping after more split news, or flipping it after the split happens. Or is it?
There could be a mad dash of selling on the first day of trading following the split. Shares could move higher leading up to the date, but once the split’s official, an exodus of sellers could push it lower, eating up much of the short-term gain.
Furthermore, if you are looking to buy it, to hold after the split happens? Think again. Post-split, this stock could see an extended sell-off.
A Return to Double-Digit Prices?
So, what could happen to GME stock once the split finally happens? As mentioned above, it’s possible that speculators, outside of the meme crowd that’s held it since early 2021, looking for quick profits from the split catalyst, pound the “sell” button.
This could put a moderate amount of downward pressure on GameStop shares. Not only that, without this group of fast money traders, the stock could once again be vulnerable to the direction of the market.
If negative external factors like rising interest rates and increased recession risk result in more market volatility, this meme play could see a sharp pullback. Much like it did during the March and May broad market sell-offs. Between the post-split exodus, and more market volatility, it’s easy to see GME returning to high double-digit price levels.
That means a fairly heavy amount of downside risk. Even worse, at high double-digit price levels, GameStop will still be trading at a price well above its underlying value. I know so far it hasn’t happened, but someday fundamentals with this stock could come back into focus. Once they do, it could result in another painful drop in price.
An Unfavorable Risk/Return Proposition, Whether as a Trade or an Investment
You can argue that GameStop has more going for it than just a stock split. Things that could actually potentially increase its underlying value, which a stock split can’t do. For example, its planned launch of its non-fungible token (NFT) marketplace. Alongside this, further progress with its e-commerce transformation.
Still, it’s hard to be confident its move into the NFT space will “change the game” for it. As a columnist at video game review site Kotaku.com said back in May, the company is getting into this space just as the NFT market is collapsing. “Late to the party” is an understatement. Upside from it becoming mainly an ecommerce company is factored into its valuation, and then some.
Stock split buzz may be continuing to keep GME stock elevated, but with the risk/return proposition unfavorable, whether as a trade, or a longer-term investment, it’s best to avoid it.
On the date of publication, Thomas Niel 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.