Struggling video game retailer GameStop (NYSE:GME) stock has seen a very protracted decline from the height of meme stock mania roughly three years ago. I know, it seems like it was just yesterday. Recent speculation has boosted GME stock by 17% recently.
Much of this rise has to do with some very dovish commentary (relative to what the market was expecting) from Federal Reserve Chairman Jerome Powell.
Anticipation around potential rate cuts (instead of hikes) pushed many investors to move up the risk curve.
GameStop is about as far up the risk curve as you can go, hence the outsized move.
This comes as GameStop has struggled to transition online, leading to an 18% stock drop after its recent disappointing Q4 2023 results.
The company reported earnings of 22 cents, missing Wall Street estimates, with hardware/accessories down 12%, software down 31%. Sales decline due to online game purchases.
Let’s dive into what to make of this very volatile price action in the stock, and whether investors are making a right move by trading this stock in either direction.
Sliding Sales and GME Stock
In addition to the aforementioned earnings numbers, a recent SEC filing also revealed that the company has laid off some of its workforce due to sales drops.
This puts GME in a lousy light despite plans and hopes of boosting profitability through such cost-cutting measures.
In Q4 2023, these cost-cutting initiatives were followed by declining sales. That makes sense – it’s hard to grow if you’re cutting locations and headcount, particularly in the retail world.
From $2.2 billion, GameStop only saw a $1.7 billion in revenue for the quarter. Other console makers like Microsoft (NASDAQ:MSFT), Sony (NYSE:SONY), and Nintendo (OTCMKTS:NTDOY), which shifted to digital downloads, greatly impacted GameStop’s sales.
Downloadable video games have clearly negatively affected GameStop’s sales. Besides GameStop, its peers like Nintendo, saw a drastic drop in hardware sales of 7.8%.
Analysts and investors also showed concern over Ryan Cohen, GME’s CEO, who plans to continue investing in cryptocurrencies and other blockchain-related stocks.
They fear that this might cause a greater decline for the company, especially now that it has seen 39% decline since the beginning of 2024.
Wedbush’s analysis forecasts GameStop’s demise by 2029 after poor Q4 results. More than cost-cutting is needed, with a yearly revenue drop of $150-$200 million.
The retailer struggles to offset declining game sales, and until the cash burn stops and there’s a positive cash flow story to talk about, many fundamental investors will continue to avoid this name.
Games Are Depreciating
GameStop’s revenue fell in the holiday quarter because of e-commerce competition, reduced spending, and declining software sales. Inflation affected hardware, accessories, and collectible sales.
As a meme stock, this is a company that’s trading based almost solely on speculative sentiment in the market at any given time.
The fact is, the gaming market is depreciating in value. Most console operators sell these games online, and GameStop’s lack of a shift to another business model really reminds me of BlockBuster.
I’m not alone, and that’s why the stock is so heavily shorted, which portends well for short squeezes.
The thing is, given GameStop’s size relative to its true value, I think it’s going to be much harder for another squeeze to take place from a technical perspective.
Better Sell GME Stock Now
This top meme stock certainly created a tremendous amount of buzz due to its 2021 short squeeze.
However, with that debacle in the rear view mirror, it’s becoming more and more clear that this is a company that’s headed toward bankruptcy. I just don’t see a way out, other than a major pivot the company has yet to pursue.
For those looking to ride this momentum higher, be careful. I think more downside is ahead over time, and it may be a slower and steadier bleed than many are anticipating.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.