Back in mid-February, those buying the dip in GameStop (NYSE:GME) stock may have seemed a bit foolhardy. But, with the king of all meme stocks going on a second Reddit rally, retail traders have again beaten Wall Street’s so-called smart money at their own game.
With those active on Reddit’s WallStreetBets subreddit scoring a second victory, should you bet on a third? Maybe, but not at today’s prices. The madness may not be completely over. Yet, given its volatility so far in 2021, I would count on another move back to $50 per share, rather than another boost back to its stunning 52-week high of $483 per share.
Also, it’s important to keep in mind that, even among meme stocks, this is more of a stock to gamble on than one to invest in. With its fundamentals having little bearing on stock price movements, buying in at today’s prices (around $204 per share) is more a wager on continued Reddit madness, than a bet this company will live up to its currently-inflated valuation.
So, what’s the best move? Stay away at today’s price levels. Shares may not be heading back to their pre-madness levels. But, while it’s hard to say when, expect it to be “game over” a second time for this stock.
How GME Stock Can Hold Some Gains
What drove GameStop’s second stunning rally? That’s a question on many people’s minds. You can point to many factors to justify the rally. But, the InvestorPlace staff put it best when they chalked it up to “hopium.” That is to say, investors buying this now are betting on continued bullishness, rather than changes to the company’s fundamentals.
Is there anything the company could do to justify the current valuation for GME stock? Not really. However, while shares are all but guaranteed to fall (once the hopium runs out), the company does have options when it comes to ways of softening the blow on the way down.
Like what? It could make progress in its planned transformation into an e-commerce play. This alone may not justify a $200 per share valuation. But, it may help shares remain at or above still-elevated prices ($50+ per share).
GameStop could also finally do what many have called it to do – sell more shares via a direct offering. Yes, this would dilute existing shareholders. But, the cash raised from this would help the keep the stock well above pre-mania levels. In short, downside risk isn’t as high as one would think for a stock running on empty. Yet, while there’s a near-term factor that could keep the madness in motion, expect further declines ahead.
What Could Keep the Momentum Going
GameStop may have ways to keep from falling back to $10 per share and below. But, that’s not going to prevent a continued sell-off, following a stunning second round of meme stock madness. Why? At some point, the investing trends that sent this to the moon will dissipate.
But, when will that happen? Next week? Next month? Over the next 12 months? Admittedly, it’s hard to tell. A cratering back to prior price levels seems inevitable in the long term. But, in the short term, all bets are off. Especially as there’s a recent development that could keep the momentum going for this and other meme stocks.
What am I talking about? As Marketwatch reported March 16, Americans are ready to deploy $40 billion worth of the latest stimulus money into crypto and stocks. Something tells me most of this won’t be plowed into blue-chip stocks.
So, does the specter of replenished Robinhood accounts point to this second rally having runway? Perhaps, but further gains from here may not be substantial. Also, it’s unclear what will keep bullishness in motion, once the short-lived boost of stimulus money runs its course.
Sell Before It’s Game Over a Second Time
It’s hard to say when. But, at some point, it’ll get tougher to keep GameStop shares at today’s price levels. Even those still vowing to “hold with diamond hands” may start to get the itch to take profit. In short, game over a second time.
Yes, that doesn’t rule out the possibility of a third Reddit Rally. But, if that happens, it likely won’t be until this stock sees a second big sell-off. For some that understand it’s a gamble rather than an investment, buying a second pullback at $50, in the hopes it hits $200 yet again, may be worth the risk. But, buying now, in the hopes it hits nearly $500 per share another time? The odds aren’t in your favor.
Bottom line: yes, GME stock is a gamble. But, at today’s prices, it’s a bad one.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.