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3 Great Reasons Not to Bet Against GameStop Stock

Betting against GameStop still is risky business. Here are some reasons why short sellers should stay away from this stock.
  • GameStop was the "original" meme stock, and it doesn't trade like regular stocks.
  • Many retail investors invest in GameStop's stock in order to cause losses for short sellers.
  • GameStop is counting on its cash pile to help the company improve its business fundamentals.
Figure 1: 3 Great Reasons Not to Bet Against GameStop Stock

Figure 1: 3 Great Reasons Not to Bet Against GameStop Stock

(Read more from Wall Street Memes: Should Bed Bath & Beyond Dilute Its Stock After The Rally?)

1. Game Stop Doesn't Behave Like a Regular Stock

First and foremost, GameStop  (GME) - Get GameStop Corporation Report doesn't trade in a standard manner. As the original meme stock, its trading activity has been based primarily on the motivation of retail investors.

And those investors have been motivated to cause the short sellers who bet against GameStop to lose money.

GameStop's loyal shareholders use social media sites such as Reddit to monitor the stock and plan coordinated short squeezes.

Unlike "regular" stocks, GameStop's valuation doesn't necessarily correlate to its business fundamentals… or to other stocks in its sector.

Retail and gaming stocks have been suffering from macroeconomic challenges. But so far in 2022, GameStop stock has managed to outperform the S&P 500.

According to hedge fund Bronte Capital — which maintains short positions in GME — GameStop's market cap is absurd, based on fundamental analysis. However, if that market cap were to double, it would not be twice as absurd. The valuations would be "similarly disconnected from reality."

2. GameStop Poses a Short-Squeeze Risk

In January 2021, 140% of GameStop's float was sold short. Retail investors piled in and drove the stock to rally 1,500% over two weeks. That was what's known as a short squeeze — and it caused short sellers to lose a lot of cash as they scrambled to exit their positions.

GameStop lists short squeezes as the main risk related to its stock on its Form-10K: "The market price of our common stock has fluctuated and may continue to fluctuate, widely, due to many factors, some of which may be beyond our control. These factors include, without limitation: (1) short squeezes…"

Today, short interest in GameStop takes up about 22% of its float. But short sellers are still being squeezed.

For example, by the end of July, GameStop was among the top 10 most unprofitable shorts. And short sellers are already down $381 million in 2022 mark-to-market losses.

3. GameStop's Has A Cash Pile

Last but not least, GameStop's financials are currently in a comfortable position. The company is debt-free and has a robust balance sheet. Much of this is due to the $1.13 billion in cash that the company has raised through its skyrocketing share price.

In addition, GameStop provides investors with a way to take advantage of extra investment opportunities in addition to its core business of brick-and-mortar stores.

The launches of the GameStop NFT marketplace and digital are good recent examples of this. The gaming retailer has been committed to investing in the digital future, with plans to further expand into Web 3.0 — internet applications that use blockchain technology.

Even though the company has a "cash pile," this does not ensure guaranteed success. That's mainly because much of this cash has been raised through share issuances, not from its operations.

GameStop has been burning through about $300 million in cash for support operations each quarter. This may put GameStop's balance sheet in a delicate position.

However, GameStop's robust balance sheet numbers may allow the company to "reach escape velocity" when it becomes profitable and has a positive cash flow, allowing it to thrive without the need for further debt or equity investments.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)