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Key Drivers of Today’s Prices

If fundamental investors are investigating, then the price action behind the stock GameStop Corp. New York Stock Exchange: GME aside from a few tweets that would be considered borderline stock manipulation from Keith Gill aka ‘Roaring kitten.’ This isn’t the first time Kitty has come into the picture to send GameStop stock soaring.

$46.42

+14.85 (+47.04%)

(As of 06/06/2024 ET)

52 week range
$9.95

$64.83

P/E Ratio
2,322.16

Target price
$7.00

In 2021, the online person sent out tweets and YouTube videos, making bold assumptions about the value of GameStop. Three years later, these assumptions have yet to take hold. Because 2021 brought lower interest rates and cheap money to the economy, it was easy for investors to get behind risky stories, but that is not the case today.

An environment of high interest rates, worrying inflation and the growing trend towards stagflation (low economic growth and high inflation) constitute the perfect cocktail for stocks like GameStop, or ‘meme stocks’, to struggle to survive for long. Here’s why the recent price action may be short-lived from a fundamental standpoint.

What investors should know about GameStop’s weak financials

Given recent data from the company’s fourth-quarter 2023 earnings results, investors may find trouble beyond sales hiring, which fell to $1.8 billion from $2.2 billion a year earlier ( a decrease of 18%).

Investors tend to focus on the bottom line of a company’s income statement, precisely net income, to drive their valuations and investment conclusions. However, this figure is often misleading and we must be careful. Net income can be manipulated by some accounting loopholes, which can sweep potentially damaging trends under the rug.

GameStop’s financials show net income of $6.7 million in the latest quarter, compared to a net loss of $313.1 million a year earlier. Of course, that would seem extremely optimistic until investors take a deeper look at the number of shares outstanding.

The fourth quarter of 2022 had 304.2 million shares outstanding, while the last quarter reported 305.2 million. So if the company made $6.7 million in net income, why would it issue shares and dilute shareholders?

Well, it’s because the business didn’t make money and here’s how to tell. Free cash flow (operating cash flow minus capital expenditures) is a more comprehensive way to measure a company’s profitability, which cannot be easily manipulated through accounting tricks.

GameStop’s FCF was negative by approximately $18.7 million in the last quarter. Last year, the company had a positive FCF of $326.6 million due to the renewal of its tax expenses and the use of cash raised from share dilution to postpone the need to take on more accounts payable.

When the company ran out of ways to finance its ongoing operations again, it saw the need to raise its stock price to unjustifiably high levels in order to issue more expensive shares, since no institution in its right mind would lend money to GameStop through bonuses.

GameStop Stock Forecast for 2024 Not Optimistic

At least that’s what Wall Street analysts believe. With a current consensus price target of just $7 per share for GameStop shares, the potential price drop today is 77.8%.

More than that, the stock has very little institutional ownership (only 29.2% currently), a sign that the so-called “smart money” wants to stay away from this company. Over the past month, GameStop short interest has risen 6.3% to cap Roaring Kitty’s attempt to send this stock flying again.

Too many negative factors suggest the stock has peaked outside of further manipulation. Even so, one of the factors that has the most weight is the general state of the current economy.

Overall Market Ranking™
1.87 out of 5

Analyst Rating
Sell

Up/down
84.9% down

short interest
Bearish

Dividend strength
Weak

Sustainability
-1.03

News Sentiment
0.38GameStop mentions in the last 14 days

Use of insider information
Sell ​​shares

Projected earnings growth
800.00%

See all details

US GDP growth was revised down to 1.3% during the last quarter, while inflation remained above 3% during that time, a dynamic typical of a phenomenon called inflation. Because of this, the largest asset managers and retail investors will focus on growth above all else, and GameStop will not fit that bill.

More than that, the stock is battling cyclically high interest rates, which tend to give the broader market a “risk-averse” outlook and further shift capital away from stocks with an uncertain future. Unfortunately, GameStop is also part of the consumer discretionary stocks, which are also negatively affected by high interest rates.

Free cash flow reigns supreme in these environments, and that’s something GameStop can’t offer investors right when they need it most.

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