GameStop had a great run, but it’s time to sell

GameStop (NYSE:GME) stock has been one of the most incredible investment stories of 2021. The first short squeeze was incredible to watch. Few market analysts could have ever imagined that a struggling retail chain like GameStop would see its shares rise by thousands of percent.

A Gamestop video game store in New York’s Herald Square shopping district

Source: rblfmr / Shutterstock.com

That wave, in turn, saved the company. GameStop raised money with a new stock offering, clearing its debts and giving it a runway to transition its business model. Now the company has time to try and find a way to downsize its old physical operations and build a digital model instead.

It was surprising enough that GameStop got this far. Then the second surprise struck. GME stocks have been at a high level for months.

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Despite GameStop still having poor financial results, investors value the company as if the digital transformation is already complete. This, in turn, has created a huge gap between the fundamental value of GameStop’s business and the value speculators attribute to it. Increasingly, social media is turning to increasingly baseless theories to try to justify the high price of GME stock.

Dark Pool Theories

GameStop’s Shortsqueeze community is still going strong. For example, on July 23, the hashtag #DarkPoolAbuse was trending on Twitter in Canada and Germany, among others. dark pools are off-exchange areas where institutional traders such as mutual funds can buy or sell large blocks of shares to each other.

Dark pools are legal and exist so that funds can trade large amounts of stock without significantly affecting the price, as would happen if you placed a large buy or sell order on a public exchange. These pools also have lower fees, saving money for regular investors who own the mutual funds and other investments in dark pools.

A group of social media users tried to argue that dark pools are nefarious. In theory, GME stock has been kept low by activity on the dark pools. In practice that makes little sense. The point of dark pools is to buy and sell stocks without with a major impact on the share price. If someone wanted to manipulate a stock price, it would be much more effective to place a large sell order on a public exchange, where people would see the large sell interest and interpret it as an ominous sign.

Long story short, dark polish generally doesn’t affect prices much anyway. If anything, they can improve price discovery like per this paper from an MIT professor. In any case, it is unlikely that activity in the dark pool will be a major factor in the value of GME stock.

Fundamental developments are limited

Why is Reddit so excited about dark pools and other mysterious trading theories? Basically, it’s because there’s nothing better to talk about. The proposed evolution of GameStop into a leading digital gaming company will take years, if at all.

And as far as news, it’s mostly bad. For instance, Netflix (NASDAQ:NFLX) recently announced it is entering the digital gaming arena. Netflix offers its existing subscribers free games. It will reportedly focus on mobile games first, but in the long run it could encroach on the more expensive gaming market.

In news specific to GameStop, Reuters reported that the company will invest more in its stores. This came after GameStop investor Ryan Cohen visited the stores undercover and found they were out of order.

It looks like GameStop will work on fixing the basics like improving inventory levels and customer service. Customers have long complained about these things when GME stocks were at a low price and the company appeared to be on the brink of bankruptcy. So it makes sense to brighten up the stores now that the company’s financial situation is much healthier.

Still, improving the stores is unlikely to change GameStop’s long-term trajectory too much. If the stock is to justify its skyrocketing share price, GameStop needs a digital-first future. So far, it’s unclear what exactly the company’s new management will do to make this happen. For example, the much-hyped announcement about non-fungible tokens (NFTs) has yielded little so far. Go to the GameStop NFT Website and see for yourself.

GME Stock Opinion

Give it to social media: The meme traders kept GME stocks high for much longer than most people thought possible.

At some point, however, GME stock is likely to fall. Fundamentally, the company is simply worth nothing that comes close to its $13 billion market cap based on its current operations. And there are also few signs that the company is moving fast enough to justify its share price.

Of course, GameStop has defied gravity for many months. So it’s quite possible that GME stocks will continue to fly high. That said, the short squeeze happened months ago. The current theories on Reddit about dark pools, Citadel, ladder attacks and the like are highly speculative to say the least.

With little more than far-fetched rumors to keep GME stock going, the most likely direction for the stock price is downward.

At the date of publication, Ian Bezek had no (direct or indirect) positions in the securities referred to in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.

Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a $300 million hedge fund in New York City. You can reach him on Twitter at @irbezek.

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