The stock price of GameStop (NYSE: GME) has seen a solid 26% rise over the last five trading days, and we believe the stock will likely continue to rally in the near term. The 26% rise can primarily be attributed to the broader rally seen in “meme” stocks (refers to the stocks that see growth primarily fueled by social media attention). There is also company-specific news that buoyed the stock price rally. GameStop is entering into a non-fungible token (NFT) platform based on the Ethereum cryptocurrency blockchain, the second most popular cryptocurrency after Bitcoin. A short squeeze inspired by one of Reddit’s blogs has resulted in a massive 11x move in GME stock so far this year. The move came after a frenzy of small investors decided to take on big institutional hedge funds, which had been short on GameStop.
Looking at the recent rally, the 26% rise for GME stock over the last five days compares with a 1.3% growth seen in the broader S&P 500 index. Now, is GME stock poised to grow further or is a decline after the recent rise imminent? The answer to this question is tricky. We know that at the current levels of over $200, GME stock is wildly overvalued, and the fundamentals do not back this kind of valuation. For perspective, at levels of $222, GME stock is trading at 2.8x its RPS of $78.25 for fiscal 2020, compared to levels of 0.2x and under seen over the last four years.
That said, going by the historical performance, the current momentum in “meme” stocks, and the fact that still (as of April end) 12 million shares of GameStop are sold short, representing 18% of the overall shares outstanding, we believe that GME stock may continue to rally in the near term. It should be noted that GME stock will likely see increased volatility in the near term, and given the lack of fundamentals, it is best for long term investors to avoid the stock.
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Looking at historical performance, out of 54 instances in the last ten years that GME stock saw a five-day rise of 26% or more, 31 of them resulted in GME stock rising over the subsequent one month period (twenty-one trading days). This historical pattern reflects 31 out of 54, or about 57% chance of gain in GME stock over the coming month. See our analysis on GameStop Stock Chances of Rise for more details.
Five Days: GME 26%, vs. S&P500 1.3%; Outperformed market
(2% likelihood event)
- GameStop stock rose 26% over a five-day trading period ending the end of May, compared to broader market (S&P500) rise of 1.3%
- A change of 26% or more over five trading days is a 2% likelihood event, which has occurred 56 times out of 2516 in the last ten years
Ten Days: GME 39%, vs. S&P500 0.9%; Outperformed market
(3% likelihood event)
- GameStop stock rose 39% over the last ten trading days (two weeks), compared to the broader market (S&P500) rise of 0.9%
- A change of 39% or more over ten trading days is a 3% likelihood event, which has occurred 70 times out of 2511 in the last ten years
Twenty-One Days: GME 28%, vs. S&P500 -0.02%; Outperformed market
(6% likelihood event)
- GameStop stock rose 28% the last twenty-one trading days (one month), compared to the broader market (S&P500) decline of 0.02%
- A change of 28% or more over twenty-one trading days is a 6% likelihood event, which has occurred 154 times out of 2500 in the last ten years
While GME stock looks like it can gain more, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for IAC Interactive vs. Activision Blizzard