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3 Reasons Why GameStop Stock Investors Should Be Bullish

Going against Wall Street's bearish opinion of the stock, we've listed three reasons why investors should have high hopes for GME.
  • GameStop is a much stronger business today than it was 18 months ago, according to the company's management.
  • GameStop shares are starting to behave with less risk and volatility than in recent quarters.
  • Retail investors own the majority of GameStop's shares and are directly registering their shares through their transfer agents to avoid brokers and market makers.
Figure 1: 3 Reasons Why GameStop Stock Investors Should Be Bullish

Figure 1: 3 Reasons Why GameStop Stock Investors Should Be Bullish

(Read more from Wall Street Memes: GameStop's Stock Is Trading At A 42% Discount, Says Morningstar)

1. GameStop Is Aiming for A Digital Turnaround

Even though GameStop's  (GME) - Get GameStop Corporation Report management is relatively secretive about its plans for the future, CEO Matt Furlong said on a recent investor call that the company is "a much stronger business than it was 18 months ago."

From a financial standpoint, that premise is unquestionable. In the second quarter (Q2) of 2021, before GameStop sold its overvalued stock and raised about $1 billion in cash, the company had $695 million in cash. Today, it has $908 million.

From a business growth point of view, the same applies. With the ascension of Ryan Cohen and Matt Furlong to the positions of chairman of the board and CEO, respectively, the company has moved from an outdated brick-and-mortar store mentality to a tech-oriented vision.

In addition, GameStop was able to pay off nearly all of its relevant portion of outstanding debt and still keep almost $1 billion in its cash flow. This has allowed the gaming retailer to strengthen its fulfillment capacity and take steps toward a digital-focused turnaround plan.

Initially, GameStop hired about 400 technology professionals from major companies such as Amazon  (AMZN) - Get Amazon.com Inc. Report, Alphabet  (GOOGL) - Get Alphabet Inc. Report, Meta  (META) - Get Meta Platforms Inc. Report, and others.

Last quarter, GameStop launched a digital wallet and an NFT marketplace. Both of these launches are cornerstones for the long-term goal that the company has of going deeper into crypto initiatives, NFTs, and Web 3.0 gaming verticals.

Currently, the markets are bearish on NFTs. But this is in line with poor crypto performance recently due to the tense macroeconomic scenario.

There are projections that the global NFT market size will reach $7.39 billion by 2028, from $1.55 billion in 2021 — suggesting a compound annual growth rate (CAGR) of 24% between 2022 and 2028, according to Valuates Reports.

Also, during the Q2 earnings call, GameStop executives revealed a deal with crypto exchange FTX. According to GameStop, this is the result of its commercial team working with its blockchain team to "establish something unique in the retail world."

However, investors should be aware that the road to modernizing GameStop's business will take time, as the company's executives never fail to mention.

2. GameStop Is Getting Less Risky Every Quarter

GameStop stock is no longer as volatile as it was in the recent past. Figures show that GameStop's one-year volatility has been on the decline for the past two quarters. Today, its volatility ratio stands at 0.95.

Figure 2: GME beta 1-year and volatility 1-year historical data.

Figure 2: GME beta 1-year and volatility 1-year historical data.

This measure of risk demonstrates how dramatically the stock's daily prices have moved over one year. Generally, volatile assets are considered riskier than less volatile ones — mainly because their prices are less predictable. Stocks with ratios above 2 indicate greater chances of large gains and losses.

As the market's 2021 euphoria collapsed under high inflation and rising interest rates, stocks in general have collapsed right along with it.

GameStop hasn't been spared. Its stock has even seen drops of up to 60%, in line with the sharp declines we've seen in the broader market.

At some points in 2021, GameStop's shares even traded with a negative beta — indicating an inverse correlation to market trends. However, GameStop's beta has gone from 0.98 to 2.08 so far this year, indicating a positive correlation to market trends.

3. GME Has Retail Investors on Its Side

GameStop's stock is owned largely by retail investors — about 55% of the company's shares. Today, institutional ownership comprises only about 27.3% of GME.

Although there was a narrative that GameStop was a "pump and dump" scheme, retail investors have not been selling their shares, as the so-called "smart money" expected after January 2021.

The fact is that, more than a year-and-a-half after the meme frenzy, GameStop is still trading at extremely high prices. That's despite headwinds, high short-selling activity, and strong Wall Street skepticism.

In addition, GameStop shareholders have been registering their shares directly through the Direct Registration System (DRS).

The DRS gives shareholders the ability to lock up their assets without relying on a brokerage house. In this way, shareholders can keep their shares away from market makers and payment-by-order-flow (PFOF) brokers.

Because it is a less practical process than routing orders through a brokerage firm, DRS users often need to have a "diamond hand" mentality, holding onto their stock investments through thick and thin.

Since the direct registration movement began among GameStop shareholders, each quarter GameStop has decided to report the number of shares registered directly with its transfer agent — in this case, ComputerShare.

According to the latest Form 10-Q, dated July 30, 71.3 million shares were registered directly through DRS. This implies that about 30% of GameStop's float is registered with its transfer agent — an increase of 20.5 million from the last quarter.

(Read more from Wall Street Memes: GameStop Stock: 71.3 Million Shares Directly Transferred To Transfer Agent)

(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)