All you can hear these days is people talking about the profit they made on GameStop shares. There are chances that this may want you to try your luck as well. With the share price increasing from $17 at the beginning of 2021 to $483 just by February, this seems like a smart investment. However, before blindly following the fad, you must take a moment to understand the reason behind this price hike and the uncertainty associated with the stock’s financial value.
GameStop is an electronics store that is particularly known for selling games and consoles. It was struggling financially and the onset of the Covid-19 lockdown made things even harder for it. However, the unexpected happened and members of a Reddit community; Wallstreetbets, started collectively trading in GameStop shares to combat short covering.
As explained in a BBC article, most experts had projected the value of these stocks to decrease significantly shortly. Therefore, they had planned on borrowing stocks, selling them at a higher price, and then re-buying them when the price decreases to make a profit. However, members of the online community decided to buy these stocks, which increased the demand and ultimately the price. Masses were happy at making a profit and getting back at the investors whom they thought had earned huge profits at their stake for long. When investors strived to buy the stocks back at even higher prices, the value of GameStop shares further increased, thus resulting in a short-squeeze.
Thus, the increase in value of this business is not based on valid grounds. What is causing the price to continuously increase is just an element of “fun” and “motivation”. Temporary gains might be accompanied by major losses. The phase can end at any moment. Therefore, it is a bad idea to invest.
Besides, there are other reasons why you should not invest in GameStop shares, or at least wait for a while before doing that, to see which direction things go.
Increased competition
GameStop, being a physical store, has faced massive competition ever since the option of downloading games online was made available by giants like Microsoft, Sony, and Epic Games. The lockdown period further added to the damage as stores were closed and even customers who were used to shopping in-person switched their buying habits. This took away a large chunk of GameStop’s market share. Even before the pandemic, the business had not been thriving with same-store sales dropping by 19.4% in the fiscal year 2019.
Furthermore, the fact that CEO; George Sherman has recently forfeited more than half a million of his performance shares for not meeting the targets is a warning in itself to halt any investment plans into GameStop.
A new investor
RC Ventures has made a substantial amount of investment in GameStop last year. With the venture capital having Ryan Cohen as its leader who has experience with successful companies like Amazon and Chewy, there are going to be some major changes in the organization, and to invest before seeing what they are would not be a wise move.
