GameStop Corp. (GME) announced earnings after the market close on December 6. The result wasn’t what investors who took huge bets last week were hoping for.
The company beat earnings estimates yet still posted a loss of $3.1 million for the quarter and the company missed revenue estimates by approximately $100 million.
The stock is trading down 6% in after-hours trading following the announcement.
That doesn’t bode well for the “meme-stock” crowd that launched into the stock in late November and early December causing the price to rise more than 45% within two days. Volume was more than 10 times the average on November 29 when the stock increased 20%.
The brief bout of enthusiasm has so far ended there. The November 29 high was $17.56. The stock fell 18% from that high and then rallied back to a lower high of $17.41 on December 4. The stock slumped once against and is now more than 20% off the November 29 short-term peak.
Can GameStop still rally?
Earnings were anemic and the company is losing money. The stock is in a long-term downtrend following the huge short-squeeze in early 2021.
Trading.biz analyst Cory Mitchell commented “GME has been making lower highs for almost three years now. Rallies have progressively become smaller over the last two years, and have been very short-lived.
“Earnings growth is expected to be negative going forward, earnings have been negative over the last several years, and sales have fallen by 9% per year on average over the last five years. There is little to be bullish about except for the brief short squeezes.”
GME does still have a short float of 23%. That’s significant, but is far from being one of the most heavily shorted stocks. That honor goes to Tivic Health Systems with a 60% short float, followed by Ebix (EBIX) with a 51% short float. There is a lengthy list of stocks with much larger short floats than GME.
While it is possible the meme crowd could stage a rally and push GME higher, there is currently little fundamental reason for it to go higher. StockRover scanning and fundamental analysis software puts the fair value of the stock at $10.77 based on industry multiples, well below the current price near $14.
Since 2022 rallies have been halted near the 200-day simple moving average (SMA). The erratic moves do spike above it on occasion, but this has been temporary. If that dynamic continues the 200-day SMA is currently intersecting at $19.23.
That is 30% above Wednesday’s close of $14.84. There are no guarantees the price will move up to that level; the overall trend is down. If it does continue to rally, expect the price to stall near $20, if history is any indication.
The bullish case for the stock and company is not so much a short-squeeze, as while short-squeezes can be profitable for some short-term trades, the squeeze is temporary and the stock typically falls back shortly after. Rather, the company itself needs to start generating profits and growth if the stock is to make a turnaround and trend higher over the long run.