In mid-February, those who buy diving in GameStop (NYSE:GME) stock may have seemed a little reckless. But, with the king of all meme stocks on a second high from Reddit, retail traders again defeated Wall Street’s so-called smart money at their own game.
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With those assets on Reddit’s WallStreetBets subreddit scoring a second win, should you bet on a third? Perhaps, but not with today’s prices. The madness may not be over completely. Still, given its volatility so far in 2021, I would expect another move back to $ 50 per share, instead of another boost back to its impressive 52-week high of $ 483 per share.
In addition, it is important to keep in mind that, even among meme stocks, this is more of an action to bet than to invest. With its fundamentals having little influence on stock price movements, buying at today’s prices (about $ 204 per share) is more of a bet on Reddit’s continuing madness than a bet that this company will live up to its currently inflated valuation.
So, what’s the best move? Stay away from current price levels. Stocks may not be returning to levels prior to madness. But, while it is difficult to say when, expect the “game to end” a second time for this action.
How GME’s shares can retain some gains
What drove the second impressive GameStop rally? This is a question in the minds of many people. You can point out many factors to justify the increase. But the InvestorPlace the team put it best when it considered “lupus”. In other words, the investors who buy now are betting on the continuation of the increase, instead of changes in the fundamentals of the company.
Is there anything the company could do to justify GME’s current stock valuation? In truth. However, while stocks are almost guaranteed (once the hopium runs out), the company has options when it comes to ways to ease the blow during the fall.
Like what? He could make progress in his planned transformation into an e-commerce game. This alone may not justify a $ 200 per share valuation. But, it can help stocks stay at prices still high or above ($ 50 + per share).
GameStop can also finally do what many say it should do – sell more shares through a direct offering. Yes, it would dilute the existing shareholders. But, the money raised from this would help keep stocks well above pre-mania levels. In short, the risk of falling is not as high as one might think for an empty stock. However, while there is a short-term factor that could keep the madness moving, expect further declines ahead.
What could keep the momentum going
GameStop may have ways to avoid dropping to $ 10 per share or less. But that will not prevent a continuous liquidation, after a dizzying second round of meme stock madness. Why? At some point, the investment trends that sent this to the moon will dissipate.
But, when will this happen? Next week? Next month? In the next 12 months? I recognize that it is difficult to say. A crater back to previous price levels seems inevitable in the long run. But in the short term, all bets are off. Especially as there is a recent development that can maintain the momentum of this and other stocks of memes.
What am I talking about? How Market Watch reported on March 16, Americans are ready to invest $ 40 billion of the latest stimulus money in crypto and stocks. Something tells me that most of this will not be invested in top-tier stocks.
Thus, the refueling spectrum Robinhood accounts point to this second track rally? Perhaps, but the additional gains from here may not be substantial. Furthermore, it is unclear what will keep optimism moving, as the short-term momentum of stimulus money runs its course.
Sale before the end of the game for the second time
It ‘s hard to say when. But at some point, it will become more difficult to maintain GameStop’s stock at today’s price levels. Even those who still promise to “hold on with diamond hands” may start to feel like making a profit. In short, the game ends a second time.
Yes, that does not exclude the possibility of a third Rally Reddit. But, if that happens, it probably won’t be until that action has a second major liquidation. For some who understand that it is a gamble, not an investment, buying a second setback at $ 50, in the hope that it will reach $ 200 again, may be worth the risk. But, buying now, hoping to reach nearly $ 500 a share another time? The odds are not in your favor.
In short: yes, GME’s shares are a gamble. But at today’s prices, it’s bad.
As of the date of publication, Thomas Niel did not (directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, an InvestorPlace contributor, has written individual stock reviews since 2016.