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Why GameStop shares have fallen 24% this week

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Jonathan Smith
·3-min read
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Arrow descending on a graph portraying stock market crash
Arrow descending on a graph portraying stock market crash

GameStop (NYSE:GME) shares continue to be something of an enigma. The initial rally in late January took a lot of people by surprise. I wrote at the time about how I thought it was a bubble that would pop. It did pop, and retraced all the way from $400+ down to circa $50 in a matter of days. But now it’s on the move again. What’s going on here?

Caught up in broader sentiment

Ignoring the first pump and slump of GameStop shares, the second rally has been different. Although it sounds odd to say it, the rally has been more sustainable. It has been moving up and down in double-digits, instead of the daily triple-digit moves from the first round. The moves higher are being met with smaller falls, such as the one we’ve seen this week.

For any blue-chip stock, a 24% fall in a week would sound alarm bells if I was invested. But with GameStop shares, it’s par for the course these days.

One reason why GameStop shares have fallen this week is not company-specific. Interestingly, the correlation between ‘meme stocks’ is becoming stronger and their share moves are tracking the others more closely. They’re also becoming more closely linked to broader equity markets. Before, GameStop shares could rise 50% in a day even if the NASDAQ was down 5%. Now, it seems like it’s trading more in line with other similar stocks (but still much more volatile).

For example, on Tuesday, GameStop shares fell around 5%. At the same time, AMC Entertainment and Sundial Growers also fell at least 5%.

Watch: How GameStop went from brick-and-mortar giant to gaming dinosaur

Are GameStop shares preempting poor results?

Another reason we’re seeing GameStop shares struggle is company-specific speculation. Next week, its Q4 results (November to January) are released to the market. If I look back to Q3 results, it didn’t make for great reading. Sales were down 30.2% versus the same quarter last year. It was also impacted by the 11% reduction in its store base as it tries to shift lanes from a failing business model to a greater online presence.

Personally, I don’t think much has materially changed in the three months, so I expect the update to be disappointing. Some investors are likely preempting this by selling their GameStop shares this week.

Even though the shares are driven mostly by speculators, the share price does still move on fundamental drivers. The business cannot expect to continually see decreasing sales from an outdated physical branch network and yet have a rising share price. At some point, there has to be a connection with reality. So I think the share price fall this week is partly due to investors thinking more rationally.

I have owned GameStop shares in the past. But right now, I wouldn’t buy. Sentiment can change very quickly and I still believe they’re overvalued. Unless we see them back down in the $40-$60 range, I’m steering clear.

The post Why GameStop shares have fallen 24% this week appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021