GameStop (NYSE:GME) stock is now up 4,620% in the past year. Of course, the catalyst for this huge move has nothing to do with GameStop’s struggling business. Reddit’s WallStreetBets community and other groups of online traders like the stock. That’s the catalyst.
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It doesn’t matter that GameStop’s revenue is down nearly 30% in the past three years. It doesn’t matter that GameStop lost $673 million in fiscal 2019, $470 million in 2020 and $215 million in 2021. When it comes to GME stock, reality hasn’t mattered for a long time. The only thing that matters these days is the story GME stock investors tell each other.
A growing number of Wall Street analysts are being forced to simply throw up their hands and drop coverage. These analysts typically consider things like same-store sales growth, discounted cash flow and price to forward earnings ratio. GME stock instead trades on pure hopes and dreams.
Baird is the latest firm to drop coverage of GameStop. Wall Street is increasingly recognizing GME stock has become one of the most dangerous stocks in the market.
GME Stock Analysts Throw in the Towel
On June 28, Baird analyst Colin Sebastian suspended coverage of GME stock. Here’s what Sebastian wrote about the decision:
“While we recognize that GameStop is in the early stages of reformulating its retail strategy to reflect the realities of the digital age, including the rapid shift away from physical video game sales and the broader transition to e-commerce, we believe share price volatility is tied more closely to non-fundamental trading, social media influences and other factors that make it difficult, at least in the near term, to make a reasonable stock rating recommendation to institutional investors.”
He added that the company doesn’t have a particularly clear business strategy at this point. There has been plenty of vague talk among GameStop bulls about the company becoming an online gaming hub. Up to this point, that is all talk.
It’s important to note Sebastian was anything but bearish prior to the meme stock madness. He previously had a “neutral” rating and $25 price target for GME stock. A year ago, $25 represented nearly 500% upside for the stock.
Earlier in June, Bank of America analyst Curtis Nagle also suspended coverage of GME stock after shares gained 56% in a week in late May.
“During this period, GME did not report any material updates and the only news on GME’s operations were very high level media reports that the company was working on a non-fungible token (NFT) platform,” Nagle said. “The recent increase in GME’s share price lines up with big moves by other ‘meme stocks’ such as BB and AMC.”
Prior to the dropped coverage, Bank of America has an “underperform” rating and $10 price target for GME stock.
Predicting Cult Stock Movements
The thing about cult stocks is that the easy part is making the case that they are overvalued. I’ve made that case for GME stock before. I recently highlighted how GameStop shares are extremely overvalued compared even to much higher-quality retail peers, such as Best Buy (NYSE:BBY).
The hard part when it comes to cult stocks is predicting where they are headed next. When a stock becomes temporarily disconnected from reality, its share price can go anywhere. It no longer represents the market value of a fractional ownership stake in a real business. It just becomes a number on a Robinhood trader’s screen that goes up or down.
When a stock becomes overvalued, analysts downgrade the stock. When it becomes undervalued, they upgrade the stock. If they don’t know what the heck is going on, they drop coverage.
I know it’s trendy for young, inexperienced traders on social media to act like they know more than professional analysts. I’m sure there are a handful of posters on WallStreetBets who are actually are more knowledgeable than professional analysts. But if you opened up your first trading account in the past two years, you are not one of them.
How to Play it
Could GME stock go to $1,000? Sure. Could it go to $0? Absolutely. I have no idea where it’s going, and neither do analysts. The average price target among the four analysts still brave enough to cover GME stock is $37.50. That target represents 81.7% downside.
If you would rather buy GME stock than play roulette or craps at the casino, go for it. I prefer the casino because you at least get free drinks. Good luck to you!
If you are trying to actually invest in solid companies and make money, stay away from GME stock. If professional analysts have no idea where it’s headed next, you probably don’t either.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
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