It has not been a fun ride for many stocks lately. That includes high-growth stocks, meme stocks and cryptocurrencies. GameStop (NYSE:GME) had a chance to rally when it reported earnings, but instead GME stock rolled over. This also comes after the newly launched meme exchange-traded fund (ETF): the Roundhill Meme ETF (NYSEARCA:MEME).
Is that the nail in the coffin for meme stocks? This is the sort of thing that generally comes at or near the top, although most meme stocks are well below their 52-week highs and/or all-time highs from earlier this year.
The Roundhill Meme ETF debuted on Dec. 8 and hit a high of $16.49. At the low on Friday, Dec. 17, the ETF was then down approximately 19%. Interestingly, though, the fund is not loaded with all the typical meme stocks.
GME Stock: Meme Fever?
For starters, when it comes to a meme-stock-based ETF, one would have expected to see GameStop as the top holding. At the very least, you could have expected it in the top 10 holdings.
Instead, though, MEME has names like ContextLogic (NASDAQ:WISH), Digital World Acquisition (NASDAQ:DWAC) — which is actually a meme name right now — and Advanced Micro Devices (NASDAQ:AMD) in its top five. Meanwhile, AMC Entertainment (NYSE:AMC) is lower on the list alongside names like Roku (NASDAQ:ROKU).
To be honest, I would have expected names like GameStop, AMC and Robinhood (NASDAQ:HOOD) to be at the top of the list here. Still, one has to wonder if the sentiment around meme stocks presents more risk than opportunity at this point.
Investing isn’t about sniffing out which stock Reddit’s r/WallStreetBets group will try to squeeze short next. While we don’t exactly live in Benjamin Graham’s world anymore — the famous fundamental investor — it doesn’t mean the fundamentals have gone completely out the window.
With a meme ETF hitting Wall Street, it just feels like excess. And if that’s the case, GME stock and its peers could have more downside in store.
Breaking Down GameStop
In reality, GameStop is a famous short squeeze away from obscurity. The stock had been bleeding lower and lower over the years, with little hope in the retailer turning things around. The financials weren’t great and neither were the have-nots of the industry. It looked to be another broken retailer that was swept up in the secular shift toward e-commerce.
With the short squeeze in 2021, GameStop found itself making new all-time highs. Yet, GME stock has cruised to levels that the fundamentals simply do not justify. Unless the company can make a major pivot (and it can!), it should eventually correct back to its prior trajectory.
GameStop has used the spike in its share price to bolster its financials and try to get back on the right track. That’s smart. As of the last earnings report, it ended the quarter with cash and equivalents of $1.41 billion and no debt “other than a $46.2 million low-interest, unsecured term loan associated with the French government’s response to COVID-19.”
That said, we also saw a year-over-year (YOY) decline in software sales and an increase in hardware sales. That’s generally the opposite of what investors want to see from a business in transition.
Further, estimates call for revenue of $5.77 billion this year, followed by a dip down to $5.64 billion next year. That leaves GME stock trading at just over 2 times revenue — roughly double the sector’s current price-sales valuation. At the same time, GameStop will not be profitable this year and is not forecast to be profitable next year, either.
Do you see where it’s getting tough to justify some of the loftiness here?
Bottom Line on GME Stock
If GME stock were to trade at 1 times revenue, it would leave it with a market capitalization of about $5.7 billion. That’s just more than 50% below its recent $11.8 billion market capitalization. If GameStop doesn’t have the short-squeeze catalyst in play, then what is the catalyst?
Do I want to come out and say GME stock is set to dip 50% from current levels? Not really. But I do know that the charts are flashing some warning signs while its current fundamentals do not justify the present valuation.
That may be a tough pill to swallow, but unless GameStop notably shifts its business, what’s to stop it from being like the business we saw before this year’s short squeeze?
On the date of publication, Bret Kenwell held a long position in ROKU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
