What’s happening with the GameStop (GME) share price

The GameStop (GME) share price is on the rise again but what’s causing this new round of growth? Zaven Boyrazian investigates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The GameStop (NYSE:GME) share price continues to defy expectations. Over the last 12 months, even with the high level of volatility, the stock is up nearly 4,600%. And just last week, it continued its upward trajectory, jumping by a further 10% in the first hours of trading on Tuesday. What caused this recent surge? And could it be that GameStop is a worthwhile long-term investment for my portfolio? Let’s take a closer look.

The bullish GameStop (GME) share price movement

The pandemic decimated a large portion of the retail industry. And for GameStop, it proved to be a complete catastrophe. But the video games retailer was in a struggling position long before Covid-19 entered the picture. After all, with most gamers buying and downloading their games digitally, the need for GameStop’s physical stores has been dwindling.

In an attempt to save the business, Ryan Cohen, the co-founder of the online pet food business Chewy, has been brought on as the new chairman of the board. His vision is to transform the company into the Amazon of gaming. Needless to say, that’s quite a challenge. Although it’s worth noting that he managed to pull off something similar for Chewy. Consequently, investors seem to have faith in this new leadership.

If Cohen succeeds, then the currently overvalued GME share price may actually be justified. And now that the firm has just finished raising over $1.1bn through the sale of five million shares, its balance sheet has been flooded with cash to fund this enterprise. That appears to be why the GME share price shot up last week.

The financials

The last time I looked at this business, the financials were quite concerning. Since then, the company’s first-quarter earnings report for 2021 has been published. And there are some encouraging signs of a potential turnaround.

Using previously raised capital from shareholders and proceeds from closing stores, long-term debt has been completely eliminated. Meanwhile, this latest round of funding has significantly improved the liquidity position of the business. In other words, GameStop shouldn’t have much trouble meeting its short-term obligations in the near future. And what’s more, sales for the quarter actually saw a 25% increase.

Overall, the business seems to be in a much better state than a few months ago. However, as promising as this is, the risks remain exceptionally high, in my opinion.

The GameStop GME share price has its risks

The risks that lie ahead

Investors have given a lot of capital to the GameStop management team with the expectation that it can deliver a turnaround. But whether this can be achieved has yet to be seen. It’s worth remembering that the online video games retail market is highly competitive. And GameStop’s brand may not be enough to grant any significant pricing power.

The recently acquired $1.1bn gives the company some breathing room and some much-needed funding for internal investment. But suppose the firm fails in its goals of transforming into a profitable digital-first multichannel game retailer. In that case, I would expect the GME share price to plummet just as quickly as it increased. After all, the stock still looks like it’s being driven by speculation rather than underlying fundamentals. And personally, that’s not the type of investment I want in my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian 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.

More on Investing Articles

Older couple walking in park
Investing Articles

3 UK shares to consider as a long-term investment for retirement

Our writer identifies three UK shares with long-term growth potential he believes investors should think about holding until retirement and…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Could this beaten-down FTSE 250 stock be on the cusp of a recovery in 2025?

After this FTSE 250 financial services stock lost another 24% of its value in 2024, Andrew Mackie sees the potential…

Read more »

The Milky Way at night, over Porthgwarra beach in Cornwall
Investing Articles

Warren Buffett says make passive income while sleeping! Here’s my plan to do so

Billionaire Warren Buffett has said many wise things over the past half a century, including a thing or two about…

Read more »

Investing Articles

£5,000 invested in this FTSE 250 company 5 years ago is now worth over £24,000

Stephen Wright looks at how a FTSE 250 food stock has more than quadrupled over the last five years –…

Read more »

Investing Articles

I asked ChatGPT to name the best FTSE 100 stock and it picked this engineering giant

Dr James Fox asked generative artificial intelligence to name the best stock to invest in on the FTSE 100 in…

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Why I think right now could be the best time to buy UK stocks in over 20 years

UK bond yields hitting multi-decade highs are causing UK stocks to fall. Stephen Wright thinks there are opportunities, but investors…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Could 2025 be the year of the great Lloyds share price recovery?

Analyst sentiment towards the Lloyds Bank share price is improving as we head into 2025, despite the short-term risks it…

Read more »

Investing Articles

1 growth stock that could soar 105%, according to Wall Street experts

This Fool has his eye on an innovative growth stock that has plunged by 80% since early 2021. But what…

Read more »