The wild trading is over, Congress is investigating, lawsuits are being filed and the SEC is looking at short selling. So, what’s next for GameStop?
There are three components to examine for the answer to that question: Fundamental expectations, valuation criteria and stock trading possibilities.
GameStop’s fundamental expectations are improved. The key ingredient is the enhanced focus on a growth strategy, spurred by the new, committed board members and fostered by new management additions capable of improving on a known brand name. Thus, GameStop is on a higher plane than when it sold for $3-5 based on the view of a weak post-Covid rebound.
GameStop benefits from stock market’s current valuation criteria. In a market focused on rapid growth, favored valuation metrics go beyond earnings and sales. Those classic value measures can be misleading when a company is rapidly building its brand, products/services, locations, marketing, delivery, patents, acquisitions, etc.
Note: There are many companies currently in or joining this rapid growth category (e.g., the electric vehicle industry). Often, their sales are low and earnings are negative, and yet their stock prices are high and rising. “Crazy” investors? No, quite the opposite. It’s the realization that implementing a growth strategy successfully means the payoff will come later.
GameStop stock trading possibilities are improved. When a stock is supported by non-classic valuation criteria, stock trading assumes a more important role. When a technical picture (stock chart) has familiar elements, investors are more willing to buy and hold. The trader activity helps create a robust market for the stock, thereby providing both liquidity and a visible, accepted price range.
The current drawback: It’s early days for GameStop – the company and the stock
GameStop, the stock, just finished a wild race. This overheated engine is knocking and pinging now, trying to find a smooth, idling speed. That transition requires three ingredients: supportive fundamental news, desirable valuation measures and a confidence-building technical picture.
The next step is to hear about GameStop’s actual plans and strategies. Likely, these will be discussed on the March earnings conference call. From that information, investors and analysts can develop expectations of where the company is headed and what the important growth criteria should be.
The good news: A selling washout is likely
As to the technical picture, some information is now at hand. However, the picture still contains abnormal moves and investor/trader actions. With the previous higher prices still fresh in investors’ minds, there are two remaining, unstable shareholder groups: “Hangers-on,” who hope for a recovery (often to get back to even so as to avoid taking a loss), and “reentrants,” who view the current price as comparatively cheap and, therefore, hope for a repeat run-up. When the stock continues to stagnate or decline, these shareholders will sell.
That final selling helps establish a price foundation that becomes visible as other investors begin buying. At that point, the stock can trade without extreme moves, affirming that the previous wildness is washed out.
The following graphs provide four different views of GameStop’s stock action.
The bottom line
GameStop has the potential of becoming a reconstructed growth stock. However, two developments need to occur to make the potential real:
- An understanding of management’s goals and strategy
- A visible bottom-settling, foundation-building stock pattern
So, patience seems the best strategy now. Hopefully, good things will happen. It’s always exciting to see a company reposition itself for the next growth uptrend instead of being mired in the past and fading away.