How Does The Current Rally In GameStop Stock Compare With The Fall In 2008 Crash?

-58.56%
Downside
27.98
Market
11.59
Trefis
GME: GameStop logo
GME
GameStop

The stock price of GameStop (NYSE: GME) trades at $30 per share, about 65% below its peak level of over $80 seen in January 2021. In contrast, Best Buy stock (NYSE: BBY) stock saw a 13% decline over this period. Note that GME stock saw a gigantic move from $5 to over $80 in January 2021, amid a large short squeeze. [1]  GME stock was trading at $31 in early June 2022, just before the Fed started increasing rates, and is now close to that level, compared to a substantial 42% gain for the S&P 500 during this period. Our detailed analysis of GameStop’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

GameStop stock has been very volatile, with its stock’s 52-week price ranging between $10 and $65, and it has surged over 80% this year. The rise in GME is driven by a broader rally seen in “meme” stocks (refers to the stocks that see growth primarily fueled by social media attention). GME stock saw increased trading activity after the social media account – Roaring Kitty – became active after a few years. Roaring Kitty is the account name of Keith Gill, who was behind a significant short squeeze in GME stock back in 2021. Keith Gill on Reddit disclosed a position of around $500 million in GME. [2]

Looking at a slightly longer term, GME stock has seen stellar gains of 500% from levels of $5 in early January 2021 to around $30 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. However, the increase in GME stock has been far from consistent. Returns for the stock were 688% in 2021, -50% in 2022, and -5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GME underperformed the S&P in 2022 and 2023.

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In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GME face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? There is no company-specific news to support the stock price rally over the recent months. Given the lack of solid fundamentals, it is best for long-term investors to avoid the stock, in our view. In fact, the $10 price estimate average of analyst forecasts reflects a large 65% downside from the stock’s current levels.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024.

In contrast, here’s how GME stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

GameStop and S&P 500 Performance During 2007-08 Crisis

GME stock declined from $14 in September 2007 to $7 in March 2009, as the markets bottomed out, implying it lost 52% of its pre-crisis value. It saw a further decline to $5 levels in early 2010, reflecting a further 18% fall between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

GameStop’s Fundamentals And Financial Position

GameStop’s revenue has been on a decline, falling from $6 billion in fiscal 2022 (fiscal ends in January) to $5.3 billion in fiscal 2024, due to lower sales of software, collectibles, and video game accessories. Although the company’s reported earnings did improve from $(1.31) to $0.02 over the same period, its margins are very thin.

GameStop’s total debt declined from $1.0 billion in fiscal 2021 to $603 million in fiscal 2024, while its cash increased from $509 million to $1.2 billion over the same period. GameStop’s debt is around 6% of the company’s equity and its cash is around 44% of its assets, implying a good financial position.

Conclusion

The potential upside could be 185% if the stock recovers from $30 currently to its pre-shock levels of $87. Despite the Fed’s efforts to tame runaway inflation rates helping market sentiments, we don’t think GME stock can return to its 2021 levels. With declining revenues and thin margins, we don’t see any solid fundamentals to drive growth for GameStop. However, any significant move on the account of a rise in “meme” stocks or from developments on the Roaring Kitty account can’t be ruled out. Overall, we believe investors will likely be better off avoiding GameStop, amid a lack of solid fundamentals. 

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 GME Return 32% 74% 383%
 S&P 500 Return 2% 13% 140%
 Trefis Reinforced Value Portfolio 1% 6% 649%

[1] Returns as of 6/12/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. GameStop Stock Jumps to New Record, Joe Wallace, The Wall Street Journal, January 25, 2021 []
  2. Keith Gill’s Reddit Account Shares Portfolio Update Showing Same GameStop Position, Hannah Miao, The Wall Street Journal, June 6, 2024 []