Why You Shouldn’t Go ‘Full YOLO’ On GameStop Stock

It’s hard to compare the meteoric rise in GameStop (NYSE: GME) shares to anything that’s happened before in the markets. “Unprecedented” is an overused word, but it truly applies to GME stock.

Usually, I attempt to provide an update about the recent price action of a stock. When it comes to GME stock, however, there’s no telling where the price will be by the time you read this.

That’s how volatile GME stock has been lately. The share price could double or get cut by one-third on any given day. This magnitude of price action sometimes happens with low-float penny stocks, but that’s not what we’re dealing with here.

Is this a form of market manipulation, or a bona fide grassroots movement? And, have share prices and company fundamentals been separated for good? Hang on tight! Let’s see if we can get to the bottom of GME stock.

Not Justified by Fundamentals

There’s one main complaint about the increase in the price of GME stock. Specifically, it’s the idea that the company isn’t really doing all that well.

That’s not just my opinion, as GameStop CEO George Sherman freely admitted that the company’s most recently reported fiscal results “were in-line with … [their] muted expectations and reflected operating during the last few months of a seven-year console cycle and a global pandemic, which pressured sales and earnings.”

I’m not trying to imply that GameStop’s third fiscal quarter was all bad. Still, the numbers don’t lie. Troublingly, GameStop’s quarterly net sales barely exceeded $1 billion and marked a 30.2% decline from the year-ago quarter.

The company also reported that comparable store sales had declined by 24.6%. Furthermore, GameStop posted a net loss of $18.8 million, or 29 cents per diluted share.

Buying GME Stock to Make a Statement

Thus, if we looked at GameStop through the lens of a fundamentals-focused value investor, it would be awfully difficult to justify a buy-and-hold strategy.

On the other hand, the Reddit users who’ve cashed in on the GME stock buying frenzy probably couldn’t care less what Warren Buffett thinks about it.

They’re probably more than happy to “stick it to the man” and bid up the stock price as a social statement.

Undoubtedly, it feels like winning when you’re not only making money, but at the same time wresting control of the markets from powerful short sellers like Citron and Melvin Capital .

And, it must be nice to get an acknowledgment from none other than Tesla (NASDAQ: TSLA) CEO Elon Musk, who tweeted “Gamestonk!!” while including a link to Reddit group r/WallStreetBets.

But Should You Buy It?

Not long ago, some popular brokerages limited certain actions with GME stock. For example, Robinhood limited the number of shares that users can purchase.

These types of restrictions must be quite frustrating to folks who are hearing about sky-high price targets on GME stock. You’ll hear all kinds of numbers being tossed around, even as high as $5,000.

In determining how to best approach these moon-shot predictions, I’ll defer to InvestorPlace.com contributor extraordinaire Sarah Smith’s take on the price-target escalation: “Take everything with a grain of salt. These bullish posts self-identify as a sort of fiction, including caveats that they are not real investment advice.”

I couldn’t have said it better myself. (And by the way, nothing that I write is investment advice, either.)

If you’d like to join the Reddit army and buy GME stock today, I would consider it a lottery ticket. The share price might go to $5,000, or it might go right back to $5, where it was a year ago.

The Bottom Line

If you have some cash that’s burning a hole in your pocket, feel free to buy one or maybe two shares of GME stock. For all we know, the stock price could go much higher.

Or, it might fall back to Earth. That’s a distinct possibility, so please exercise moderation. After all, the Reddit army doesn’t offer compensation for financial losses in GME stock.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.