Currently sitting at just under 200p, the stock seems to have held onto some of its momentum. However, does GameStop have the capacity to push higher in September? Let’s take a closer look.

The story so far

The GameStop share price shot up drastically after being ‘short squeezed’. This typically occurs when a stock is heavily shorted by a large hedge fund, which is betting the price will go down. Retail investors then get behind the share, driving its price up – the opposite of what hedge funds are expecting. Hedge funds pay interest on their shorted shares, and when the share price increases, so does the interest. Once this reached an unsustainable level (when share price increases rapidly), hedge funds buy back their shares, and the stock surges upwards even more.

For GameStop, this plan was cultivated on the online platform Reddit and helped drive the share price up over 1,800%. The GameStop share price has since been extremely volatile, often fluctuating in double-digit percentages daily.

GameStop share price: next steps

There are 76m Gamestop shares outstanding and 63m of these are floated on the exchange for investors to trade. Some 12% of these floated shares (7.5m) are held in short positions. Therefore theoretically, GameStop could be squeezed again. This is the only way I see GameStop shooting up further in the short term.

Looking at company fundamentals paints a bleak picture for the firm. Since 2018, over 1,000 stores have been shut down in an effort to drive up poor margins. The company’s Q2 2021 earnings report highlighted a 25% increase in sales of $1.3bn compared to Q2 2020. However, this figure is rather misleading considering most stores were shut during Q2 2020. Comparing this to Q1 2019, sales were actually down almost 18%.

In addition to this, I feel the GameStop share price is heavily overvalued, trading at almost 16x book value. Considering the firm is still loss-making, the current share price seems absurd to me.

One positive for GameStop moving forward is the $2bn capital it has been able to raise by issuing new shares. This capital will be used to expand the firm’s e-commerce business. GameStop has already announced leases on warehouses in Pennsylvania and Nevada helping spur the online shift. In an increasingly online world, it is important the GameStop expands past its traditional bricks-and-mortar business plan. Although the firm will likely never match e-commerce giants, I think this transition could benefit the GameStop share price down the line.

The Verdict

I think the GameStop share price has the volatility to make double-digit percentage moves in September. However, I don’t think I will see it explode again in September. Personally, the weak financials and outlandish valuation are a red flag for me. However, I am intrigued to see how the GameStop share price story continues to pan out, so will be watching from the sidelines but not buying.

The post Will the GameStop share price explode in September? appeared first on The Twelfth Magpie.

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Dylan Hood 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.

Doubling my ISA: what will it take?

To double the value of my portfolio, I need to achieve an annualised return of around 15%. In other words, I need my capital to grow 15% in 2021, another 15% in 2022, and so on. This is how things would look if I used the nominal sum of £1,000.

Compound interest really is a wonderful thing. And this doesn’t include the impact of any reinvested dividends!

So, how do I hit this target?

Clearly, being invested in the best stocks helps. But what makes a company better than others? Everyone will have an idea about this.

A ‘meme stock’ investor would say that AMC Entertainment and GameStop would qualify. I respectfully disagree. Their share prices have certainly ‘popped’ in 2021 but have since flagged. They’re best left to traders, in my opinion. 

Personally, I don’t think I need to take on such risk to get a 15% annualised return. For me, the best ISA stocks are those that are leaders in niche markets, boast fantastic brands, have strong growth potential, and/or generate great returns on the money they invest. I think I have several in my portfolio already. These include kettle appliance maker Strix, equipment manufacturer Somero Enterprises, and online behemoth Boohoo. 

But let’s take a step back here. The fact that something is achievable does not mean it will happen, of course. Let’s briefly look at what things could stop me from achieving my goal.

What could go wrong

Unfortunately, there’s no guarantee my ISA stocks will perform. Last week alone showed just how unforgiving other investors can be with the share prices of Best of the Best and Avon Protection being pummelled. Both have previously scored highly on the things I usually look for.

Even if the companies I own do very well, they could still be held back by general market jitters. These days, investors are getting increasingly worried about rising inflation, for example. And even if this does prove ‘transitory’, there will always be another potential setback waiting in the wings to knock confidence. 

How I can improve my chances

Aside from hoping my stock-picking is on form, there are four other things I think I can do. 

1) Keep investing. This includes periods in which markets head south. It sounds simple but it’s harder to do in practice.

2) Go small. Smaller companies have the ability to grow at rates larger companies simply can’t. This can often lead to a huge uplift in share prices. 

2) Use up my ISA allowance. As well as continuing to invest, it would also be a good idea to use my £20,000 ISA allowance in full. The more money I put to work, the greater the potential impact of compounding.

3) Avoid frothy markets. A final, debatable point is that it might make sense to avoid markets (and companies) where valuations are looking stretched. Having more than doubled over the last year, the US market looks a little too hot to me right now. 

The post How I plan to double my Stocks and Shares ISA in 5 years appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Strix, Somero Enterprises and boohoo group. The Motley Fool UK has recommended Avon Protection, Somero Enterprises, Inc., and boohoo group. 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.

Wait – what’s a meme stock?

Let’s recap. A meme stock is one that, thanks to huge attention on social media sites such as Reddit, jumps in value. As evidence of sizeable gains is posted online, others buy in. The fear of missing out (FOMO) then prompts even more people to do the same. Those betting against the company (short-sellers) are also forced to close their positions, further increasing the price. It’s really that simple.

So far, the most high-profile meme stocks have arguably been US video games retailer GameStop and cinema chain AMC Entertainment. Both have helped many readers of WallStreetBets become rich over the last year. If I’d bought the former on 28 December and sold exactly one month later, for example, I’d have made 22 times my money.

What happens from here?

What happens next is a great question. It’s also one I can’t answer with any real certainty. No one can. This is unchartered water.

That said, the performance of GameStop shares since January does tell us something. In February, they tumbled to $45. By March, they were back to $260. In May, they had fallen to $145. In June, they had climbed back over $300. 

Depending on your particular strategy, this volatility is either a gift from the market gods or the sort of nerve-shredding experience that puts some people off ‘investing’ for life. Regardless, I think it sends a clear message about how volatile meme stocks might be going forward.

So, would I buy?

Based on the December to January returns, you’d likely think me mad to reply in the negative. Who would turn down such an amazing performance in such a small space of time? Nope, not me!

The problem is that hindsight’s a wonderful thing. Investors need to consider not just how they might feel if they’d invested in GameStop last year, but how they’d feel if they bought at the peak and then saw the value of their holding plummet. I reckon the fear of missing out would quickly become the fear of still being in. 

Looking ahead, I’d still struggle to buy a meme stock. As a quality-focused investor, I’m hooked on businesses and/or investment themes that should last. Are GameStop or AMC quality stocks? Nope, not on any metric. Will Reddit readers be looking at them in a year? Probably not.

The really interesting thing about all this is that, because business fundamentals are irrelevant, anything could potentially become a meme stock. Unfortunately, this also makes it hard to know which will be next to gain sufficient traction on social media. It’s fascinating stuff… from a distance.

Ready to gamble?

Meme stocks clearly have the potential to generate big profits very quickly. However, this is risky stuff and not something most Fools would be comfortable with. Anyone entering this arena needs to know they’re at the mercy of the crowd. A love of rollercoasters is essential. 

If my reluctance ever wavered, I’d only ever play with money I could afford to lose. Without an edge, the latter’s likely.

The post Where next for meme stocks? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers 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.

The bull case for the GameStop (GME) share price

2020 has been a challenging time for most retailers. After all, lockdown restrictions made footfall in physical stores drop significantly. But GameStop has been struggling for many years due to the rising popularity of downloading digital copies of video games instead of buying a physical disk. This transition by gamers effectively made the company an unnecessary middleman, which saw its revenues slashed and earnings drop into the red.  

But is that about to change? Following the recent events, activist investor Ryan Cohen bought a 13% stake in the business and will become chairman of the board in June. He previously co-founded the online pet food business Chewy and intends to use his knowledge to transform GameStop into a “digital-first, omnichannel retailer”. Beyond this, the firm has also replaced its CEO and CFO, resulting in a brand new management team.

This move towards higher-margin e-commerce appears to have given investors hope for the future potential of this business. And if successful, could enable the business to make a comeback. It’s also worth noting that the new management team recently signed a partnership with Microsoft. While there is limited information about this deal, it does include a royalty-like structure in which GameStop will receive a cut for each Xbox game sold on its website. But as promising as this may be, I remain quite sceptical about the GME share price.

Troubling financials

Whether new management can achieve its goals remains to be seen. As it stands, there’s limited information available on what a digital-first GameStop will look like as no guidance has been issued.

Looking at its recent financial statements, there appear to be some misleading signs of recovery that may be inflating the GME share price. While revenues declined by a further 22%, net losses were almost halved from $400m in 2019 to $238m in 2020. The lack of advertising, receiving, and distribution costs last year due to the pandemic substantially reduced the costs of sales. And this led to a seemingly improved bottom line. But looking at the gross profit margin, the firm’s profitability actually declined from 29.5% in 2019 to 24.7%.

On the balance sheet, long-term debt was reduced from $420m to $216m. This is an encouraging sign for me. Yet the money didn’t come from sustainable sources such as operating profits, but rather from closing and selling 462 stores.

The bottom line

To keep the lights on, the management team turned to shareholders to raise additional capital. And in April this year, it successfully issued 3.5m additional shares, raising $551m.

These new funds certainly give the business some breathing space. But, the online transformation of GameStop has only just started. And beyond the brand’s nostalgia factor, I can’t identify any discernible competitive advantages this business has in the online space.

As far as I can tell, the valuation of the GME share price is being driven entirely from speculation rather than fundamentals. I’m not interested in adding it to my portfolio.

The post Is the GameStop (GME) share price a ticking-time bomb? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Zaven Boyrazian does not own shares in GameStop. 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.