Whether or not you’ve dabbled in GameStop (NYSE:GME) stock before, you may be tempted to do so following the big drop over the past month. Down more than 41% since August, shares are showing a little life ahead of the videogame retailer’s earnings report at market close today.
But before you decide to “buy the dip” with this popular meme stock, you may want to sit this one out. There’s little to suggest that the company will meet/beat expectations, with its latest quarterly results based on the earnings misses in the preceding quarters.
Even if it does beat expectations, that may not be enough to save the day. Other factors, namely the decline of the “meme stocks” phenomenon, could outweigh it. In turn, applying more pressure onto shares. Add in a rich valuation, and all signs point to “avoid.”
| GME | GameStop | $23.78 |
GME Stock Can’t Buck the Trend
GameStop has a mixed track record when it comes to living up to analyst estimates. Over the past two years, it’s only beaten revenue estimates 50% of the time and earnings estimates 38% of the time. This is why I’m doubtful that its latest numbers will set the world on fire.
Even if, despite negatives like a post-pandemic drop in video game spending, the company manages to beat the Street’s estimates, it may not result in a big move higher for GME stock as “meme stock” trends continue declining in popularity.
Retail traders, burned by market declines driven by rising interest rates, have largely moved out of meme stocks. The Federal Reserve’s decision to keep raising rates to fight inflation further dampens the appeal of meme stocks.
Alongside this, something else has soured sentiment for meme stocks. That would be recent events involving Bed Bath & Beyond (NASDAQ:BBBY).
As you likely know, this is another meme stock that GameStop Chairman Ryan Cohen has been involved with. In a reversal to 2021, investing trends are no longer its friend. This points to the stock continuing to move lower whether its latest numbers pleasantly surprise or utterly disappoint.
Still Pricey Based on Fundamentals
Barring a few short-lived “relief rallies” that could arise along the way, GME stock stands to stay on its current trajectory. Worse yet, it may have a ways to go before it finally bottoms out.
Why? Based on its fundamentals, shares remain overvalued. Given its lack of profitability, we can’t use metrics like price-to-earnings (P/E) to give it a rough valuation estimate. We can, however, use metrics like price-to-sales (P/S) to compare its value to that of other electronics retailers.
Until it fully becomes an online retailer, omnichannel retail is an accurate description for GameStop’s main business. Comparing P/S ratios, this stock trades at a high premium to names like Best Buy (NYSE:BBY). While Best Buy has a P/S ratio of 0.43x, it has a P/S ratio of 1.24x.
This implies a valuation of around $8.71 per share. To longtime fans of GME, this may sound absurd. What about, for instance, its move into emerging areas like non-fungible tokens, or NFTs?
Given the 99% drop in daily volume seen with the largest NFT exchange out there, I’m not holding my breath that big success awaits this company’s recently launched NFT marketplace.
The Takeaway With GME Stock
I’m not the only one concerned that GameStop has a big downside risk. As InvestorPlace’s Eddie Pan recently reported, one analyst price target (from Wedbush’s Michael Pachter) isn’t far off from the above-mentioned rough valuation estimate.
Pachter currently gives the stock a $7.50 per share price target. Using a sum-of-the-parts analysis, the analyst added up his estimated values for its retail business ($2.50 per share), its NFT exchange ($1.50 per share), and its cash position ($3.50 per share), to come up with this figure.
What’s the takeaway from all this? GME stock may eventually be worth a look as a turnaround play, but only if it falls to or below its current fair value. Until then, it’s best to stay away, as its aura of being the top meme stock continues to lose its luster.
GME stock earns a C rating in my Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.