Published On: January 28, 2021
Written by: Ben Atwater and Matt Malick
Over the last week, it seems like everyone is talking about GameStop (GME), a brick and mortar video game retailer. In the last 24 hours, we heard mention of GameStop all over the financial media, in a White House press briefing and an ESPN SportsCenter broadcast. A number of friends, family and clients have also asked us for our thoughts.
The frenzy over GameStop stems from its stock price soaring from under $20 per share on January 12th to a recent high of over $347, a more than 1,600% gain, after participants in an online chat forum, Reddit, recommended the stock. Users of the Reddit forum, along with other online enclaves for stock chatter, have pushed similar stocks’ prices to the moon over the past year.
To be clear, no rational, informed investor would consider GameStop a sound long-term investment. It pays no dividend, has no free cash flow and hasn’t earned a full-year profit since 2017. GameStop is rapidly shuttering stores and the future looks bleak as more retail shopping shifts online and video game consoles offer more direct downloads and streaming.
Rather, buyers of GameStop are speculating. If you buy GameStop now, you’re betting that someone else will pay more for it tomorrow. There’s no “floor” under the stock price where long-term buyers will step in based on the intrinsic value of the underlying business. And there’s no convincing case for future growth in the company’s profits, cash flow, dividends or share buybacks.
Speculating can be fun, and relatively harmless, if done with a small amount of “play money.” We would neither encourage nor discourage a client from throwing a little money into a speculative stock like GameStop. But we have no more insight into the stock’s near-term trajectory than we do into whether the Chiefs will cover the spread in the Super Bowl or what lottery numbers you should play today.
As a note of caution, however, GameStop and similar high-flying stocks may be an unhealthy sign for overall market sentiment. Throughout history, when speculators chase “easy money,” it often ends badly for everyone. It’s for this reason that we continue to stress the importance of a disciplined investment process, a focus on a stock portfolio representing real cash-generating businesses and an allocation to high-quality bonds to create cash flows and stability when the market performs poorly.